Overcoming Small Business Debt Challenges: A Comprehensive Guide
As an outsourced CFO working closely with nearly 20 small businesses, I’ve seen firsthand the struggles that debt can bring—whether it’s securing financing, managing payments, or simply staying afloat in a challenging economy. While some businesses are fortunate enough to grow without relying on borrowed capital, that isn’t the reality for most. In fact, data from the Federal Reserve shows that approximately 70% of small businesses carry debt in some form.
Over the past couple of years, borrowing has become more difficult for small business owners. A key indicator of this shift is the shrinking National Money Supply. In April 2022, the supply exceeded $22 trillion. By November 2024, it had dropped to $21.4 trillion—the first decline since 1949. While this might seem minor on the surface, it signals a broader issue: less money is circulating in the economy, including funds for lending. Small business owners are feeling the impact of this tighter lending environment.
From conversations with my clients, I’ve learned that the challenges small businesses face when it comes to debt go beyond simply getting access to financing. It’s about navigating a system that’s increasingly competitive and complex. Last year alone, eight of my 20 clients either took out new loans or refinanced existing debt. These discussions involve more than just securing funds; they’re about making informed decisions, finding creative solutions, and positioning your business for long-term success.
In this guide, I’ll break down some of the most common hurdles small businesses face when it comes to debt, along with actionable strategies to overcome them. Whether you’re in the early stages of debt management or actively looking for ways to improve your loan applications, these insights will help you gain clarity and build a stronger financial foundation for your business.
The Challenges of Small Business Debt
1. High Interest Rates
The Hurdle:
For many small businesses, the focus often falls heavily on interest rates. But while it’s true that even a small percentage point can make a big difference, sometimes chasing the lowest rate isn’t always the smartest move. Take, for example, a small business with a debt of $175,000. A 2% difference in interest translates to $3,500 per year—something that definitely matters. However, in some cases, a higher interest rate might come with other favorable terms that can be more valuable in the long run.
Real-Life Example:
One client of mine had a line of credit charging 33% interest, which was clearly unacceptable. But agonizing over whether to go with a 14% or 16% loan might be missing the bigger picture. A higher-interest loan could offer temporary relief, like three months of interest-only payments, followed by 12 months on the term. In this case, the monthly payments came out $700 lower compared to a lower-rate option. Yes, the total interest cost would be higher, but the additional $8,400 in cash flow per year gave them the flexibility to manage other expenses without over-burdening their budget.
Solution: When evaluating loans, it’s important to balance interest rates with cash flow and liquidity. These factors can be just as critical, if not more, than the interest rate itself. For tips on evaluating loan options and their impact, visit this resource here.
2. Short Loan Terms
The Hurdle:
Short repayment terms can put immense pressure on a business’s cash flow, particularly during slower seasons. Of the eight clients I worked with who took on or refinanced debt last year, none of them had repayment terms longer than four years. This is often because banks determine loan terms based on revenue cycles, cash conversion, or other factors, resulting in shorter repayment periods with higher monthly payments.
Solution: Small business debt can be managed more effectively by employing a layered approach:
- Credit Cards: While interest rates tend to be high, credit cards offer flexibility and short-term liquidity—ideal for 30-45 days of cash needs.
- Lines of Credit: Perfect for seasonal businesses or those experiencing temporary cash flow gaps, with more favorable rates than credit cards. These should be used when liquidity is needed for more than 45 days but less than six months.
- Term Debt: For businesses that don’t have the cash to repay within six to nine months, term debt can spread payments over time while freeing up short-term liquidity.
By strategically layering these tools, small businesses can better manage debt without sacrificing flexibility. Learn more about how to leverage credit cards for small business financing here.
3. Lack of Collateral
The Hurdle:
One of the most common challenges small businesses face when seeking debt is the lack of tangible assets. Service-based businesses, for example, often operate with minimal equipment or physical assets—making it harder to satisfy collateral requirements.
Solution: If your business doesn’t have traditional collateral, consider these options:
- Local Programs: Many states and communities partner with organizations that help businesses lacking traditional collateral. For example, Energize Colorado provides funding specifically to businesses without bankable assets.
- Accounts Receivable or Inventory: A tech startup I worked with successfully leveraged accounts receivable and future contracts to secure a working capital loan—turning existing business assets into collateral.
- Personal Guarantee: As a last resort, a personal guarantee can be used, but it exposes your personal assets (like your home or savings) to risk. This should only be pursued once all other options have been exhausted.
For businesses without traditional collateral, community-backed lending programs like Energize Colorado offer alternative financing solutions. You can learn more about it here.
4. Poor Financial Performance
The Hurdle:
One of the biggest obstacles small businesses face when applying for loans is historical financial performance. Even if your business is in a strong position today, lenders often look at past results—and those past results might not reflect your current potential.
Solution: I worked with a franchise system that was struggling to secure financing. Their initial approach included basic QuickBooks financials and a brief narrative—but it wasn’t enough to convince lenders. Instead, we focused on:
- Franchisee Success Metrics: We highlighted store-level profitability, which gave lenders clear evidence of strength at the operational level.
- Recasting Financials: We separated one-time sales and marketing expenses to clarify operational health and future profitability.
- Forecasting with Store Data: We built a detailed financial forecast based on current data and operations, emphasizing scalability and long-term potential.
- Packaging the Pitch: We transformed this information into a professional pitch deck. Leading with this visually compelling presentation captured the lenders’ attention and ultimately secured the financing needed.
Managing Debt for Long-Term Success
To truly overcome debt challenges, it’s essential to maintain a sharp focus on cash flow, remain proactive, and be open to restructuring when necessary.
1. Monitoring Cash Flow:
A key component of managing debt effectively is staying on top of cash flow. Regularly tracking your inflows and outflows allows you to spot potential liquidity crunches before they become crises. For example, one client of mine set up a weekly cash flow dashboard that provided real-time insights into available funds and upcoming obligations. By monitoring these metrics, they were able to make timely adjustments and avoid falling behind on payments.
2. Restructuring Debt:
Sometimes, restructuring debt is necessary to better align with the evolving needs of your business. Consolidating multiple loans into one, or extending repayment terms, can reduce monthly payments and free up cash flow. For instance, a manufacturing client of mine successfully restructured their debt, which allowed them to invest in new equipment without defaulting on any obligations.
Tips for Securing Small Business Debt
If you’re looking to strengthen your chances of securing small business financing, preparation and strategic decision-making are crucial.
1. Prepare Thorough Documentation:
Lenders want to see that your business is a safe investment. This means providing detailed and accurate financial statements, a clear business plan, and realistic revenue projections. Highlight your repayment capacity using metrics like debt-to-income ratio and cash flow coverage. The more professionally you present your financial data, the less risk you appear to lenders.
2. Build Strong Relationships with Lenders:
Establishing genuine relationships with lenders can be invaluable. Keep them informed about your business’s progress—even when you aren’t actively seeking a loan. Building this goodwill can pay off when it’s time to apply for financing.
3. Explore Alternative Lending Options:
Don’t limit yourself to traditional banks. Consider other avenues like SBA loans, online lenders, or community-based programs. I’ve seen clients successfully secure microloans through local nonprofits, which not only provided funding but also mentorship to help grow their businesses.
Preparing your financial statements and business plan carefully can increase your chances of loan approval. If you need further support with your financial statements, check out our free guide here.
Book a Consultation Today
Navigating small business debt doesn’t have to be a solitary journey. If you’re ready to take your business to the next level, book a consultation with me today. Together, we’ll develop tailored strategies to help you secure financing, manage debt effectively, and create a long-term plan for sustainable growth.
Schedule Your Free Consultation and let’s transform your business financials into a powerful story of success.