How to manage debt and protect your small business

Published Friday 20 March 2026

Table of contents

• Challenges small businesses face with debt
• Assess your complete debt situation
• Create a budget for debt management
• Stop adding new debt
• Prioritize which debts to pay first
• Reduce costs strategically
• Find ways to increase revenue
• Renegotiate, refinance, or consolidate your debts
• Negotiate more favorable payment terms with creditors
• Raise funds to pay your debts
• Get professional help with debt
• Know all your options
• Manage debt with confidence
• FAQs on managing business debt

Key takeaways

• Create a complete inventory of all your business debts including bank loans, credit cards, supplier invoices, tax obligations, and informal debts, then use this information to calculate your total monthly payment obligations and track progress over time.
• Prioritize debt payments strategically by paying employees first, followed by tax obligations, key suppliers, and aged payables, since missing these payments can result in asset seizure, penalties, or operational disruption.
• Stop taking on new debt immediately while you work to reduce existing obligations by using cash or debit for purchases, delaying non-essential investments, and building a small emergency buffer to handle unexpected expenses.
• Communicate proactively with creditors before missing payments to negotiate more favourable terms such as extended payment periods, reduced interest rates, or temporary payment pauses, as early communication increases your chances of reaching beneficial agreements.

Challenges small businesses face with debt

Running a business involves risk. Recessions, supply chain issues, and unexpected costs can push you further into debt than planned. For instance, following the COVID-19 outbreak, over 60 percent of Canadian firms experienced a decline in revenues, with nearly 33 percent seeing a drop of 30 percent or more.

If that happens, take action early. Waiting passively often makes things worse. The strategies below can help you regain control before debt becomes unmanageable.

Assess your complete debt situation

Assessing your debt means creating a complete picture of everything your business owes. Before you can manage debt effectively, you need to know exactly what you're dealing with.

Gather information on all business debts:

• Bank loans: Note the principal balance, interest rate, monthly payment, and remaining term
• Credit cards: Record current balances, credit limits, and interest rates
• Supplier invoices: List outstanding amounts and payment terms
• Tax obligations: Include any overdue GST, payroll taxes, or income tax instalments
• Informal debts: Document any money owed to friends, family, or business partners

Accounting software can pull much of this information together automatically. Once you have a complete view, calculate your total debt and monthly payment amounts. This baseline helps you measure progress and make informed decisions about what to prioritize.

Create a budget for debt management

A budget for managing debt allocates your available cash between essential business expenses and repaying debt. This helps you identify how much you can realistically pay toward debt each month.

Start by tracking your income and expenses:

• Calculate monthly revenue: Use average figures from the past 3–6 months
• List essential expenses: Include rent, utilities, payroll, inventory, and insurance
• Identify discretionary spending: Note expenses you could reduce or eliminate
• Determine available cash: Subtract essential expenses from revenue

The remaining amount represents what you can direct toward repaying debt. If this figure is too small to make meaningful progress, focus on increasing revenue or reducing costs before committing to aggressive schedules for repaying debt.

Review your budget monthly and adjust as your situation changes. Xero's budgeting tools can help you track progress and identify opportunities to reduce debt faster.

Stop adding new debt

Stopping new debt means avoiding additional borrowing while you work to reduce what you already owe. Adding new debt while trying to pay off old debt makes the problem harder to solve.

Take these steps to prevent debt from growing:

1. Pause new credit applications: Avoid taking on additional loans or credit cards
2. Use cash or debit for purchases: This prevents accumulating new credit card balances
3. Delay non-essential investments: Postpone equipment upgrades or expansion until debt is under control
4. Build a small emergency buffer: Set aside enough cash to handle unexpected expenses without borrowing

Research shows the recent increase in cash holdings is concentrated in just 10 percent of firms.

If your business requires occasional credit to manage cash flow gaps, establish clear limits. Define the maximum amount you'll borrow and the timeline for repaying it before taking on any new debt.

Prioritize which debts to pay first

Prioritizing debt means deciding which debts to pay first when cash is limited. Getting this wrong can lead to serious consequences:

• Lost employees: Missing payroll damages trust and may trigger penalties
• Seized assets: Creditors can take stock, equipment, or bank account funds
• Government action: Unpaid taxes can result in asset seizure or bankruptcy, sometimes without a court hearing

Use accounting software to track all outstanding debts and payment dates. Seeing this information helps you make informed decisions about what to pay first.

Your exact payment order depends on your business type and creditor flexibility. Consider these priorities:

• Payroll: Pay employees first to avoid penalties and maintain morale
• Tax obligations: Governments can seize assets without court approval for unpaid taxes
• Key suppliers: Protect relationships with suppliers essential to your operations
• Aged payables (60+ days): Late payments damage your credit score and future borrowing ability
• Rent and utilities: Keep your business location operational
• Secured debts: Sole proprietors and partners face personal liability for these debts
• Insurance: Maintain professional indemnity and public liability coverage
• Credit cards: Prevent interest charges from compounding

Accounting software lets you see all debts, payment schedules, and cash flow in real time. Without this information at your fingertips, it's difficult to prioritize payments or track how you're reducing debt.

Reduce costs strategically

Reducing costs strategically targets expenses that don't directly support revenue. Use accounting software to identify your largest outgoings, then evaluate each for potential savings.

1. Reduce rented space: Downsize if you're not using all your current premises
2. Review staffing carefully: Consider redundancies, but avoid replacing employees with expensive short-term consultants
3. Negotiate supplier terms: Request discounts for bulk purchases, regular orders, or strong payment history

Aggressive cost-cutting can backfire if you reduce capacity for growth. Before making cuts, consider the downstream impact on revenue.

Avoid cutting areas that drive income:

• Marketing: Reduced spending means fewer new customers
• Sales capacity: Smaller teams can't handle larger contracts
• Product range: Less inventory limits what you can offer customers

Use accounting software to forecast the financial impact of different scenarios for cutting costs. The goal is to trim unnecessary expenses while preserving your capacity to generate revenue.

Find ways to increase revenue

Increasing revenue can help you repay debt faster and restore cash flow. Consider these approaches:

1. Offer early payment discounts: Encourage customers to pay faster by reducing prices for quick settlement
2. Gather customer feedback: Understand what customers value most, then adjust your offerings to increase margins
3. Ask your network for referrals: Meet with your accountant, banker, or financial advisor to request introductions to potential clients

Renegotiate, refinance, or consolidate your debts

Refinancing means replacing an existing loan with a new one at better terms. Debt consolidation combines multiple debts into a single payment with one interest rate.

Both strategies can reduce your monthly payments and simplify how you manage debt.

Refinancing options:

1. Extend your loan term to lower monthly payments
2. Negotiate a reduced interest rate if your credit allows
3. Accept that lenders may charge higher rates for perceived risk

Consolidation considerations:

• Combine multiple business loans into one payment
• Compare total interest costs, not just monthly amounts
• Read terms carefully before signing with consolidation companies

Negotiate more favorable payment terms with creditors

Negotiating with creditors can reduce your payment burden without damaging relationships. Contact creditors before you miss payments, as communicating proactively increases your chances of favourable terms.

When approaching creditors:

1. Explain your situation honestly and present a clear repayment plan
2. Emphasize your intention to pay in full over adjusted terms
3. Remind them that accommodation benefits both parties, since business failure means they receive nothing
4. Request specific changes such as extended payment periods, reduced interest, or temporary payment pauses

Raise funds to pay your debts

Raising funds while carrying debt is challenging, as high debt loads can make businesses more financially vulnerable and less attractive to investors and lenders. However, several options remain available:

• Friends and family loans: May offer favourable rates, but can strain personal relationships
• Asset liquidation: May provide faster payment than litigation or bankruptcy, as creditors often accept this approach
• New investors: May require giving up more equity, potentially 30% or higher compared to 5% for a debt-free business

Explore additional funding options in our guide to financing your business.

Get professional help with debt

Getting professional help with debt provides expert guidance when self-managed strategies aren't working. Consider seeking help if you're missing payments, receiving collection calls, or feeling overwhelmed by your debt situation.

Several types of professionals can assist with business debt:

• Accountants: Help you understand your financial position, identify cost savings, and develop strategies for repaying debt
• Credit counsellors: Provide budgeting advice and may negotiate with creditors on your behalf
• Insolvency practitioners: Advise on formal options like consumer proposals or bankruptcy if debt becomes unmanageable
• Financial advisors: Help you balance repaying debt with other business and personal financial goals

When choosing a professional, verify their credentials and ask about fees upfront. Many offer to consult with you for free initially to assess your situation.

Find an advisor who understands small business finances and can provide guidance tailored to your circumstances.

Know all your options

If you're struggling with business debt, recent economic analysis shows a growing number of businesses with high leverage.

Explore every option to keep your business running, including help from local business advisory agencies. If you can't recover, bankruptcy doesn't have to end your entrepreneurial journey.

Many successful business owners failed at least once before finding a winning strategy. What you learn from managing debt, even unsuccessfully, can strengthen your next venture.

Manage debt with confidence

Business debt becomes manageable when you can see your full financial picture, have a plan, and use the right tools. Start by assessing what you owe, then create a budget that allocates cash toward repaying debt while keeping your business operational.

Prioritize debts strategically, negotiate with creditors proactively, and seek professional help if you need it. Many business owners have worked through significant debt and emerged stronger.

With cloud accounting software like Xero, you can track all your debts, monitor cash flow in real time, and make informed decisions about your business finances. Get one month free to see how clearly viewing your finances can help you take control of your debt.

FAQs on managing business debt

Here are answers to common questions about managing debt as a small business owner.

How much business debt is too much?

Debt becomes problematic when monthly payments consume more than 30–40% of your gross revenue or when you regularly struggle to pay what you owe. The right amount depends on your industry, cash flow stability, and growth plans.

What are the golden rules for managing debt?

The key principles are: know exactly what you owe, prioritize high-interest and essential debts first, communicate proactively with creditors, and avoid taking on new debt while repaying what you already owe.

How should I allocate my budget when managing debt?

The 50/30/20 rule suggests allocating 50% of income to essential expenses, 30% to discretionary spending, and 20% to repaying debt and saving. For businesses with significant debt, consider temporarily increasing the portion you use to repay debt.

When should I consider debt consolidation?

Consolidating makes sense when you have multiple high-interest debts and can secure a lower overall interest rate. It simplifies payments but only helps if you stop accumulating new debt after consolidating.

Should I focus on paying off debt or growing revenue?

Both matter, but sustainably reducing debt usually requires maintaining or growing revenue. Aggressively cutting costs in ways that reduce your earning capacity can make debt harder to repay over time.