Debt is a necessary part of doing business but it also presents risk. Businesses loans, lines of credit, and credit cards all provide capital to spend on new equipment and employees and finance growth. It’s estimated that half of small businesses shut down within their first 5 years. Fortunately, there are many things you can do to ensure your small business enjoys the benefits of borrowing but avoids falling into the debt trap. 

Before borrowing money, read the fine print. Business loans and lines of credit can include loopholes – some of which may help you and others which may cause headaches. 

Paying off some of your debt earlier than scheduled can be a great way to reduce your debt burden. But some lenders impose penalty fees, making early payments less worthwhile. 
Does the lender offer a grace period? A grace period can be a good opportunity for a business to generate positive cash flow before starting payments. But back-ended payments can be a problem for businesses if income falls short of expectations. 

In some cases, such as when income is seasonal or highly variable, your business might find it preferable to pay late payment fees. But late payment fees can damage a business if not planned well in advance.

Knowing your monthly earnings and monthly payments is key to managing your debt. Your monthly earnings (or net income) are your revenues subtracted by all other business costs, such as taxes, salaries and other expenses. If you have a business loan, your monthly payments are your principal (the total loan amount divided by the number of months to pay it off) plus interest. Stable cash flow and a disciplined budget can also help you pay off your debts. If your cash flow and spending are predictable, then it should be easy to predict how much money you’ll have at the end of each month to pay your lender. But if cash flow is variable and you lose track of expenses, you may have trouble meeting payments and start generating more debt than you can handle.

Keep the loan in a separate account to your usual business account, and transfer money across as and when it is required.This step adds another layer of consideration to purchases, making it hard to spend impulsively. The worst-case scenario is spending creep, where daily business spending eats into the loan and reduces your capacity to make big investments.

The best way to ensure you don’t miss your monthly payments is to automate them. Aside from saving you the trouble of manually paying your lender every month, automated payments can have a positive psychological effect. If you see your monthly payments coming out of your business bank account every month, it’ll naturally be easier to factor in those payments when budgeting your monthly expenses.

Debt consolidation refers to the transferring of debts from one or multiple lenders to a single business loan from a new lender. Your new lender deals with paying off your old debts and offers you a new loan, ideally with a lower interest rate and lower monthly payments. It can be difficult enough for small business owners to pay back one loan. But if your business has debts from multiple lenders, having to manage all those payments could be the thing that prevents you from growing your business – or worse, leads to it shutting down altogether. Debt consolidating makes it easier to manage your monthly payments and reduces the possibility of defaulting.