Debt management for small businesses: Take control of your finances

Published Friday 24 October 2025

Table of contents

• What is debt management for small businesses?
• Where to start with business debt management
• Challenges for small businesses coping with debt
• Understand your situation and take action
• Discuss more favorable payment terms
• Renegotiate, refinance or consolidate bank loans
• Increase your revenue
• Reduce business costs: Three tips to consider
• Be intelligent about where you cut costs
• Raise funds to pay your debts
• Take control of your business finances with the right tools
• FAQs on debt management

Key takeaways

• Prioritize debt payments strategically by focusing first on payroll, then suppliers and business partners, followed by aged payables (60+ days), bills, secured debts, insurance, and credit cards to protect your business operations and relationships.

• Contact creditors proactively before missing payments to negotiate more favorable terms, presenting a realistic repayment plan that emphasizes mutual benefit and documenting all agreements in writing.

• Use accounting software to track all outstanding debts, payment schedules, and monthly obligations in real-time, enabling you to make informed decisions and maintain complete financial visibility.

• Cut costs intelligently by analyzing your largest expenses through accounting software and eliminating waste without damaging your ability to generate revenue, such as negotiating with suppliers or reducing unused space rather than cutting marketing or essential staff.

What is debt management for small businesses?

Debt management is about creating a clear plan to control and pay off what your business owes. It's not just about making payments, but about finding a sustainable way to reduce your debt while keeping your business healthy.

For a small business, this means looking at all your debts, understanding your cash flow, and making strategic choices to get back on solid financial ground.

Where to start with business debt management

Many business owners face debt challenges, but taking the first step can make a big difference. Start by getting a complete picture of your financial situation. Gather all your loan agreements, credit card statements, and outstanding invoices.

Once you have everything in one place, you can see exactly what you owe, who you owe it to, and what your interest rates are. This clarity helps you build an effective debt management plan.

Challenges for small businesses coping with debt

Unexpected events can push any business into debt problems. Economic downturns, supply chain disruptions, or sudden market changes can strain your finances.

Acting quickly gives you more options and helps you stay in control of your business finances.

Early intervention gives you more options and better negotiating power with creditors. Addressing debt early means you have more strategies to choose from.

Understand your situation and take action

Assess your debt by reviewing your current financial position, setting payment priorities, and creating a realistic action plan. Start by gathering complete information about what you owe and to whom.

Use accounting software to track all your outstanding debts, payment schedules, and monthly obligations. You should be able to access this information instantly to make informed decisions.

Prioritize your debts to focus your limited resources on the most critical payments first. Here’s a framework to help you set payment priorities:

• Payroll: If you don't pay your employees' wages on time, you may face penalties. You might be able to renegotiate contracts, but this can affect morale.
• Suppliers and business partners: Protect your relationships with your most loyal suppliers and partners.
• Aged payables (60 days or more): If you don't pay, you could damage your credit score and make it harder to borrow money in the future.
• Bills: Pay outgoing costs like rent and utilities to keep your business running. Not paying these can also affect your credit rating.
• Secured debts: If you run your business as a sole proprietor or partnership, you could be personally liable for debts. Creditors may try to take your assets. If the IRS seizes your property, you may have the right to redeem the real estate within 180 days of the sale.
• 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 may not know who you are paying or how much you owe each month.

If you miss debt payments, you could face serious consequences:

Business impacts

• Employee layoffs or departures
• Asset seizure by creditors: This can be costly. For example, if the IRS sells your property, you must pay the purchase price plus 20% interest per year to redeem it.
• Expensive legal proceedings
• Damaged credit ratings

Government enforcement

• Immediate asset seizure for unpaid taxes: The IRS usually waits at least 10 days after public notice before selling your property.
• Bank account freezes: For example, if the IRS levies your bank account for unpaid taxes, the funds are held for 21 days before being sent to the government.
• Business bankruptcy proceedings
• Personal asset claims (for sole proprietors and partnerships)

Discuss more favorable payment terms

Negotiate with your creditors as soon as possible and present a clear repayment plan. Early communication shows good faith and increases your chances of favorable terms.

Effective negotiation steps:

1. Contact creditors before missing payments – proactive communication builds trust
2. Present a realistic payment plan – show how you'll resolve the debt completely
3. Emphasize mutual benefit – creditors recover more money when businesses survive
4. Document all agreements – get modified terms in writing to avoid confusion

Focus your negotiations on full repayment rather than debt reduction. Most creditors prefer modified terms over the risk of not being paid at all.

Renegotiate, refinance or consolidate bank loans

You can restructure your loans by changing the terms to reduce monthly payments and improve cash flow. Here are some options:

Term extension

• Benefit: Lower monthly payments spread over longer periods
• Consideration: May increase total interest paid over time

Debt consolidation

• Benefit: Single monthly payment instead of multiple creditor payments
• Consideration: Review terms carefully to ensure actual savings

Refinancing

• Benefit: Potentially lower interest rates with better credit
• Consideration: Requires strong credit history and business performance

Increase your revenue

Increase your revenue quickly to address immediate debt obligations. Short-term revenue boosts can give you the breathing room to put longer-term debt management strategies in place.

• Offer discounts for fast payment to improve your cash flow
• Ask for customer feedback to tailor your products or services and potentially increase your prices
• Meet with your accountant, financial planner, or banker to discuss business plans and potential referrals

Reduce business costs: Three tips to consider

Reduce costs by identifying and cutting expenses that don't directly contribute to revenue or business survival. Use accounting software to analyze your largest expenses and find opportunities to save:

1. Reduce the amount of space you rent or lease, especially if you're not using it all.
2. Consider laying off some employees, but be careful about hiring too many short-term consultants, as that can be more expensive.
3. Negotiate with suppliers. Ask for discounts, especially if you buy in bulk, place regular large orders, or have a good payment history.

Be intelligent about where you cut costs

Cut costs carefully so you don't damage your ability to generate revenue. Cutting costs without a plan can actually make your financial position worse.

Marketing budget

• Risk: Fewer new customers and reduced brand awareness
• Alternative: Focus spending on highest-performing channels only

Physical space

• Risk: Limited inventory display and reduced customer experience
• Alternative: Negotiate better lease terms or sublease unused areas

Staff reductions

• Risk: Cannot handle increased business when opportunities arise
• Alternative: Reduce hours or negotiate temporary pay cuts

Before you cut any costs, use accounting software to model the financial impact. Focus on eliminating waste while keeping your ability to generate revenue.

Raise funds to pay your debts

You can raise capital to pay down your existing debts. While this can be challenging if your business is struggling, you still have several funding options:

• Borrow from friends or family if you can get favorable rates, but be aware this can strain relationships
• Sell assets to pay creditors, as they may prefer this over bankruptcy or legal action
• Find new investors, but be aware they may want a larger share of your business if you are in financial difficulty

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

Take control of your business finances with the right tools

Taking control of your business finances requires the right combination of strategy, tools, and professional support. Many business owners face debt challenges – the key is acting decisively with proper financial visibility.

Next steps for debt management:

• Use accounting software to track all debts and payment schedules in real-time
• Consult business advisors for personalized guidance on your specific situation
• Implement cash flow forecasting to prevent future debt problems
• Build financial reserves once you've stabilized your debt situation

With Xero accounting software, you get the financial visibility you need to manage debt and make informed decisions. Automated tracking, real-time reporting, and cash flow insights help you stay ahead of problems and focus on growing your business.

Get one month free and take control of your business finances today.

FAQs on debt management

Here are some common questions businesses might have about debt management.

Is debt management worth it for small businesses?

Yes, a good debt management plan can be incredibly valuable. It helps you regain control over your finances, lower stress, and create a clear path to becoming debt-free. By organizing your payments and potentially lowering interest rates, you can improve your cash flow. This lets you focus on growing your business.

What's the difference between debt management and debt consolidation?

Debt management is a broad strategy for controlling and paying off your debts. It might involve budgeting and negotiating with creditors. Debt consolidation is a specific tactic where you combine multiple debts into a single loan, often with a lower interest rate, to simplify payments.

How long does it typically take to resolve business debt issues?

The timeline varies depending on the amount of debt, your cash flow, and the strategies you use. Some issues can be resolved in a few months. Larger debts might take several years to pay off. The key is to create a realistic plan and stick with it.

Can I manage business debt while keeping the business running?

Absolutely. The goal of debt management is to help you keep your business running successfully. By creating a sustainable payment plan and improving your cash flow, you can manage your debts and keep your business open.

What happens if I can't reach agreements with all creditors?

It's not always possible to get every creditor to agree to new terms. If you're struggling to make progress, seek advice from a financial advisor or a credit counseling service. They can offer expert guidance and help you find the best solution for your situation.