Smart Debt Management: Strategies to Keep Your Business Financially Healthy

Debt is a powerful tool for business growth when managed wisely, but it can become a crushing burden when mishandled. Smart debt management ensures you leverage borrowed capital effectively while maintaining financial stability.

Understanding Good Debt vs Bad Debt

Good debt generates returns that exceed its cost. A loan to purchase equipment that increases productivity or inventory that will be sold at a profit qualifies as good debt. Bad debt finances depreciating assets or covers operational shortfalls without addressing underlying problems. Before taking on any debt, calculate the expected return on investment.

The Debt-to-Income Ratio

Lenders and financial advisors recommend keeping your debt service coverage ratio (DSCR) above 1.25, meaning your net operating income should be at least 125% of your debt obligations. This buffer protects you during slow periods and signals financial health to potential lenders and partners.

Creating a Debt Repayment Strategy

List all debts with their interest rates, balances, and payment terms. Consider the avalanche method (paying off highest interest debt first) to minimize total interest paid, or the snowball method (paying off smallest debts first) for psychological momentum. Set up automatic payments to avoid late fees and credit score damage.

Refinancing and Consolidation

As your business grows and credit improves, explore refinancing options to secure lower interest rates. Debt consolidation can simplify multiple payments and potentially reduce your overall interest burden, but ensure the new terms truly benefit you.