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How to Get Your Small Business Out of Debt

Updated on January 31, 2017

Debt can be a good way to finance growth and expansion of your business. However, many businesses, just like individuals are struggling under the weight of too much debt.

According to the U.S Small Business Administration, nearly 50 percent of all small businesses fail within their first five years. This is caused in part by insufficient capital and too much debt.

As a business owner, you should know the right amount of debt to take and also the right time to take debt in order for your business to be successful.

Would some of the companies that are struggling right now have been in a better place by making better borrowing decisions right now? Maybe. Nonetheless, when creditors are knocking at your door, as a small business owner you have two options: try to save the business while settling unpaid costs, or let the business fail, but with an exit strategy to minimize the financial consequences.

Save the Business

The first option in trying to save a business from going under is taking money from your own pocket, or from the revenues of the business and putting it back into your business. This is a calculated risk that has as much chance of failing as it does of succeeding. You should only opt for it when you can justify it as a short-term tactic that will pay off in the long-run.

Some other options to save your business are:

Cut Costs

You need to identify areas where you can reduce costs. Do you need such a big office in the nice part of town? Are your phone systems too expensive? These are some of the questions you need to ask in order to identify what got your business in debt.

Perhaps you can sublease unused space and sell off unused equipment to free up cash.

While shrinking your workforce sounds awful, it may be a necessary step for you to take in order to keep your business alive.

Revisit the budget

A bad budget may be the reason why your debt keeps piling up. You should create a budget based on your business's current financial situation. Your business revenues should also be able to more than cover your fixed monthly expenses such as rent and utility bills. Then allocate a portion of the budget for variable costs such as manufacturing materials.

Take a step of paying more than the minimum. This is to prevent your debt from piling up; and take years to pay off.

You should also track your expenses. An inexpensive way of doing this is by using accounting software like Intuit's Quickbooks or Quicken, Sage Software's Peachtree, MS Money or using web-based programs such as NetBooks.

Contact Customers and Suppliers

Communicate and stay connected to your customers in order to find ways to increase your exposure and improve your business model. This can help increase your revenue. If customers are not paying on time, you could offer them discounts if they pay quicker.

Also stay in contact with your suppliers to arrange discounts and deferred payments.

Contact Creditors

Do not ignore your lenders, as this could make matters worse. Let your creditors know about your financial situation and the problems facing your business. Ask if they have a hardship plan that you can work with, such as lower interest rates or restructuring your payment options.

Outsourcing your debt problems to a professional debt-relief company is an option if dealing with multiple creditors is getting in the way of the more important task of running your business. The firm can negotiate with your creditors on your behalf and settle the debts for less than what you owe.

Consolidate your loans

Consolidating your loans into one payment can reduce your monthly costs without harming your credit. A good idea would be to consolidate several short-term loans into one long-term package.

A business debt consolidation loan enables you to deal with a single creditor, instead of many. It can even get you a lower interest rate.

You can hire a debt consolidation company to negotiate the new loan, collect payments from your business and pay off your previous creditors.

Allow the Business to Fail

If your business is on life support and cannot be salvaged, then it may be time to pull the plug. You should go for an orderly shutdown, not just simply locking up and walking away. Creditors may sue you and go after your personal assets.

Sell the Business

Note that if your business has more debt than assets, it may be difficult to find a buyer. Selling your business to one buyer is usually easier than selling off individual assets.

Liquidate Assets

You could also liquidate the business and negotiate with your creditors for the distribution of its assets. Because litigation is expensive and forcing you into bankruptcy means that they might receive even less, majority of lenders will accept to settle for less than the full balance of the debt.

Many lenders require that owners of small businesses take personally responsibility for loans or lines of credit. So remember that if your business debt has been personally guaranteed, you are still liable for those obligations, unless your creditors let you off the hook.


This is an option that should only be considered when your personal assets are at risk. If the only recourse is against the business, there is no need to go through any bankruptcy process.

Businesses that operate as either sole proprietorships or partnerships expose their personal assets to greater risks. Structuring your new business as a corporation, LLC or other limited-liability entities helps protect personal assets from business creditors.


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