How to manage debt

Debt can be a useful tool to start and grow your business. But what can you do if that debt starts to become a problem?

A small business owner checking their accounts on a mobile phone

Challenges for small businesses coping with debt

Risk is part of running a business. You can't easily plan for recession, pandemics, natural disasters or other negative events, because if you take a too-cautious approach then you'll never succeed. But sometimes the odds will go against you.

If you find yourself unexpectedly further in debt than you'd like, don't panic. There are options available but they require action. If you sit back passively and wait for the worst to happen, it just might.

So take action. Manage what you owe before it becomes unmanageable. Here are some useful tips to help you take control of your debts.

Understand your situation and take action

If you’re facing increasing debt, take action instead of hoping for the best. If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock and costly court cases brought by your creditors.

Potentially worse than that is the risk of government intervention. If you fail to pay the taxes you owe, the government will come after their money.

Depending on where you live in the world, governments have the authority to get their money any way they can. They can seize your business assets, help themselves to the contents of your bank account, declare you bankrupt and even take personal assets such as your house or car. Sometimes this can be done without even a court hearing.

So stay sharp and aware of your situation. Use good quality accounting software to keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times.

After that, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order is for you to decide:

  • Payroll: If you don’t pay your employees' wages on time you may be penalised for this. You may be able to renegotiate contracts with some of your people, but that's likely to affect their morale.
  • Suppliers and business partners: Avoid losing valuable goodwill with your most loyal suppliers and business partners.
  • Aged payables (60 days or more): If you don’t pay, your credit score will be impacted, which will affect your ability to borrow money in the future.
  • Bills: Outgoing costs such as rent and utility bills need to be paid to keep the lights on. And again, not paying these could affect your credit rating.
  • Secured debts: If you run your business as a sole trader or partnership, you might be held personally liable for debts, and creditors could try to take your assets.
  • Insurance: Especially professional indemnity and public liability cover.
  • Credit cards: Avoid penalties or interest charges as these can pile up quickly.

Good accounting software is vital here. Without it you'll have little idea who, and how much, you're paying each month.

Renegotiate, refinance or consolidate bank loans

You may be able to renegotiate your bank loan so it's spread over a longer term, to reduce the interest payments and also the monthly repayment cost.

The bank may want to charge a higher rate due to the perceived increased risk of default, so you won't save as much money as you might like. Even so, this can give you some breathing space.

You may be able to combine your business loans into one payment that will reduce monthly costs and not adversely affect your credit score? Talk to debt consolidation companies about this, but read the small print carefully.

Consider refinancing, if your credit record will allow it.

Discuss more favorable payment terms

Talk to all your creditors. Explain the situation and make it clear you have a comprehensive plan for resolving it. Stay positive – tell them you want to pay in full but need to renegotiate terms for that to happen. They should understand that it's in their interest to accommodate your request. After all, if your business fails they'll get nothing back.

Be proactive here. If you approach your creditors before they start chasing you for missed payments, they're more likely to take you seriously and agree to your terms.

Increase your revenue

Easier said than done, of course, but there are ways you can boost short-term revenue. By taking action, you could reduce your debt payments enough to get you back on track.

  • Offer your customers mark-downs or reduced prices: Discounts for fast payment can help improve your cash flow.
  • Get to know your customers better: Get their feedback on your business so you can tailor what you sell to meet their needs better – and maybe charge a mark-up for doing so.
  • Meet with your accountant, financial planner or banker: Share your business plans and see if they can introduce you to some of their other clients, perhaps in exchange for a small finder’s fee.

Reduce business costs: Three tips to consider

Think about where you can cut costs. Use accounting software to list your largest outgoings and see where you can make reductions. For example:

1. Reduce the amount of space you rent or lease, especially if you're not using it all.

2. Consider making some employees redundant, but be careful about hiring too many short-term consultants instead – as that can work out to be more expensive.

3. Negotiate with suppliers. Don’t be shy about asking for discounts, especially if you buy in bulk or place regular large orders and have a good payment history.

Be intelligent about where you cut costs

You might feel like you need to cut costs to the bone when debt looms over you, but sometimes it can be counter-productive. For example, consider the global economy. Some countries chose austerity because of excessive debt – yet they suffered with more sluggish economies than those that tried government stimulus exercises (at least in the short term).

There are different schools of economic thought about this, but don't assume cutting costs will automatically save you money. It's where and how you cut costs that matters.

For example, if you slash your marketing budget you might save a lot of money in the short term, but you will lose potential new clients. Cut your shop floor space and you'll save rent, but reduce the range of stock you can display to customers. Make some of your employees redundant, and you won't be able to handle any larger contracts that come your way.

Cut when you need to, but do it sensibly. Before you start, use accounting software to forecast the financial impacts of different cost-cutting options. Trim the fat out of your business, not the muscle.

Raise funds to pay your debts

This will be difficult. A new business that's free from debt is a better investment proposition than one that's having financial problems. Still, you have choices:

  • Borrow from friends or family: This can be awkward and could strain your relationships, but you may get favorable rates.
  • Liquidate assets: Creditors are likely to accept this because they'll want to be paid at least something, and this way they'll get a better deal than if you went bankrupt. Their only other option might be litigation, and that's timely and expensive.
  • Look for new investors: Be aware that any new money will be expensive for you. Investors who might have wanted 5% of your new business in exchange for their money might want 30% now you're in difficulties.

Read more about ways to finance your business in our guide.

Be realistic about your options

More than a third of business owners are less than comfortable about their levels of debt, so you're not alone. Do everything you can to keep your business running, and talk to local business advisory agencies to see what help they can offer.

With luck and perseverance, you'll be able to turn your business around. But if things don't improve, you may have to consider closing your business and declaring bankruptcy. That would hurt, of course, but it doesn't have to be the end of your dreams.

Many entrepreneurs fail in business at least once before finding a successful strategy. And as long as you learn from the experience, you may be able to bounce back stronger next time.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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