Debt often gets a bad rep in business, but used wisely, it can be one of your most powerful utensils for growth.
Whether you’re investing in new equipment, managing cash flow or expanding your team, having access to capital can open doors.
The real trick? Knowing how to borrow sensibly, stay in control and avoid the common pitfalls that put a spanner in the works for many business owners.
In this guide, we’ll walk through the essentials of business debt management, help you understand different types of business borrowing and explore your financing options if you’re planning to grow.
Understanding Business Debt
Not all debt is created equal. Before you can manage it properly, it’s important to understand the different forms it can take and when each one might make sense for your business.
Short-Term vs. Long-Term Debt
- Short-term debt typically refers to borrowing that’s due within a year. This includes things like business credit cards, overdrafts or short-term loans. It’s often used for managing cash flow or covering temporary gaps.
- Long-term debt, on the other hand, is used for bigger investments, like buying property, vehicles or machinery. These loans are usually repaid over several years and tend to come with lower interest rates.
Secured vs. Unsecured Loans
- Secured loans are backed by assets (like property or equipment). If you can’t repay, the lender can recover the asset.
- Unsecured loans don’t require collateral but may come with higher interest rates because the lender is taking on more risk.
Understanding the terms of your borrowing, including interest rates, repayment schedules and penalties, is key to making sure you don’t take on more than you can handle.
Smart Strategies for Business Debt Management
Managing your debt isn’t just about paying the bills. It’s about keeping your business as healthy as a horse (financially) and giving yourself room to grow.
Here are a few practical strategies that can help you stay on top of it all:
1. Prioritise High-Interest Debt
Start by identifying which debts cost you the most to carry. Paying off high-interest loans or credit cards first can reduce the overall amount you’ll pay back. This frees up more capital to reinvest elsewhere.
2. Consolidate Where It Makes Sense
If you’re juggling multiple loans or credit lines, consolidation might help. Rolling everything into one loan with a single monthly payment (and hopefully a better interest rate) can make things more manageable. Just be careful not to stretch the loan term too far, lower monthly payments might look appealing but could cost more over time.
3. Renegotiate with Lenders
Don’t be afraid to talk to your lenders. Especially if your financial position has changed. You may be able to negotiate better terms, such as reduced interest rates or extended repayment periods. Lenders are often willing to work with you if you’re proactive and transparent.
4. Monitor Your Debt Service Coverage Ratio (DSCR)
One of the key measures lenders use is the Debt Service Coverage Ratio (DSCR), a calculation of your business’s ability to cover its debt obligations from operating income. A DSCR comfortably above 1.25x is generally seen as healthy. If your ratio dips below 1.0, it may signal trouble to lenders and make it trickier to secure new funding.
Financing Options for Growth
If you’re planning to expand, launch a new product or hire staff, you may need extra funding. The good bit? There are a whole host of financing options out there, but choosing the right one totally depends on your business goals, cash flow and appetite for risk.
1. Traditional Bank Loans
These are one of the most common financing routes. Banks offer both secured and unsecured loans, and repayment terms can range from a year to several. They’re best suited for established businesses with a solid credit history.
2. Business Lines of Credit
A flexible option that works like an overdraft. You only borrow what you need, when you need it, and pay interest on the amount used. Great for your seasonal businesses or managing uneven cash flow.
3. Asset Finance
Need equipment, vehicles or some machinery? Asset finance allows you to spread the cost over time rather than pay upfront. The asset usually acts as security, which can make the terms more favourable.
4. Crowdfunding & Peer-to-Peer Lending
If you’re launching something innovative or community-focused, crowdfunding can help you raise funds from supporters. Peer-to-peer lending platforms also connect you directly with private investors who might offer more flexible terms than traditional lenders.
5. Venture Capital & Angel Investment
This route isn’t for everyone, but if you’re scaling fast and open to giving up equity, investors can provide significant capital, along with business expertise. Just be prepared for a more hands-on relationship and a focus on high growth.
A more diverse finance landscape
We wanted to note that in today’s SME lending environment, it’s not just about high street banks. There’s growing availability of funding from challenger banks, fintech lenders and state-backed schemes like the Growth Guarantee Scheme. With so many options now in play, working with a financial planner can help you navigate what’s best for your needs, whether it’s a traditional bank loan, a flexible credit line or something more tailored.
Common Mistakes to Avoid
Even experienced business owners can run into trouble if debt isn’t handled carefully. Here are a few common traps worth not falling into…
- Borrowing without a plan: Taking on debt without a clear repayment strategy can quickly spiral out of control.
- Over-relying on short-term credit: Credit cards and overdrafts can be helpful, but costly if used for long-term funding.
- Ignoring early warning signs: If cash flow is tight, don’t delay. Missed payments and defaults can damage your credit rating and limit future options.
Don’t overlook the fine print
When borrowing, especially from banks and specialist lenders, you may be asked to agree to covenants, such as keeping your DSCR above a certain level, or to provide a personal guarantee. This means you could be personally liable if the business defaults. Always review these conditions carefully and speak to a financial adviser before signing on the dotted line.
Keep Debt Working for You
Business debt isn’t the big bad wolf… but it does need respect. Managed well, it can support growth, improve your financial flexibility and help you seize opportunities. Managed poorly, it can put your business at risk.
The right approach to business debt management involves being proactive, staying grounded in reality and taking a strategic approach. Whether you’re carrying existing debt or exploring funding for expansion, getting advice from a financial expert can help you choose the best path forward and avoid costly missteps down the line.
Want to explore financing options tailored to your business?
Our advisers at Informed Financial Planning can help you weigh up your options, plan repayments and create a funding strategy that supports your growth goals without putting your cash flow under pressure.
