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How to Deal with Small Business Debt

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Businesses, like individuals, sometimes suffer from too much debt. Taking on the right amount of debt – and at the right time – can mean the difference between a business that struggles and one that succeeds. According to the U.S. Small Business Administration (SBA), roughly 50 percent of small businesses fail within their first five years, largely because of insufficient capital, poor credit arrangements and too much debt.

For most businesses, borrowing makes sense when it is necessary to bolster cash flow or finance growth or expansion. Yet, due to the Great Recession, the last few years have been particularly difficult for small businesses that overextended themselves by borrowing too much money without the capacity to make back what they owe.

Would some of these ailing companies have been better able to avoid onerous debt by making sounder borrowing decisions early on? Possibly. Nonetheless, once creditors are at the door, it’s too late to perform a retroactive financial analysis. In these cases, a small business owner has two ways to deal with debt: try to save the business while attempting to settle outstanding accounts, or allow the business to fail, but with an exit strategy that minimizes the financial consequences.

Save the Business

Obviously, the first option in trying to save a business while managing its debt is taking money out of your own pocket and putting it into your business. This is a calculated risk that probably has failed as many times as it has succeeded, and should only be done if you can justify it as a short-term tactic that promises the likelihood of a long-term payoff.

Cut Costs

If you cannot bail out your business with private funds, you need to identify areas where you can reduce costs. Perhaps you can sublease unused space or sell off unused equipment. While shrinking your workforce is not an attractive option, it may be necessary to keep your business alive.

Contact Customers and Suppliers

Stay connected with your customers, and seek out ways to increase your exposure and/or improve your business model, and thus your revenue. Offer your best customers markdowns if they can pay you quicker. You should also contact your suppliers to arrange discounts and/or deferred payments.

Contact Creditors

Contact every creditor, and advise them of your predicament. Ignoring your lenders can only make matters worse, while tackling a debt problem is easier when you act early. Since it’s in everyone’s interest to find a solution, request that your lenders work with you to lower interest rates, increase your credit line or restructure your repayment options.

If dealing with multiple creditors or collection agencies is taking you away from the more important task of running your business, you can outsource your debt problems to a professional debt-relief company. A reputable firm can negotiate with your creditors on your behalf to settle debts for less than what is owed.

Consolidate Loans

You can consolidate your business loans into one payment, which may reduce monthly costs without negatively affecting your credit. A business debt consolidation loan can allow you to deal with a single creditor, rather than many, and perhaps get a loan with a lower interest rate. The process can be facilitated by a debt consolidation company hired to take responsibility for negotiating the new loan, collecting payments from your business, and paying off your previous creditors. The loan may be unsecured or secured with business assets.


As a last resort, a Chapter 11 bankruptcy is a route you can take to salvage a company, especially if the business’s debt challenges are temporary and the company is otherwise viable. Bankruptcy is an expensive and complex process, requiring the services of an experienced bankruptcy attorney, but it may be an option for reducing your business debt burden. If your business has assets that are worth less than your debt, bankruptcy may allow you to pay only what the assets are worth and not the entire balance due.

Allow the Business to Fail

If your business is on life support with debts that cannot be managed, it may be time to think about an orderly shutdown. Simply locking the doors and walking away is a risky choice; you may be sued by creditors who can go after your personal assets.

Sell the Business

Your first option might be trying to sell your business to pay off your lenders. Dealing with one buyer is usually easier than selling off assets, and a sale may free you from future obligations, once you have repaid your creditors. However, if your business has more debts than assets, you may not be able to find a buyer.

Liquidate Assets

Your next option would be to liquidate the business and negotiate with your creditors for the distribution of its assets. Most lenders will accept settlement for less than a debt’s full balance, because litigation is expensive and forcing you into bankruptcy would mean they could receive even less.

Remember, if you have personally guaranteed a business debt — many lenders require that a small business owner take on personal responsibility for loans or lines of credit — you will still be liable for those obligations, unless freed by your creditors.


As a last resort, you can declare a Chapter 7 business bankruptcy, turning over the business to the bankruptcy trustee who will sell its assets, go after any outstanding accounts receivable, pay owed taxes, and distribute any remaining funds to creditors.

Chapter 7 personal bankruptcy eliminates any personally guaranteed business debts. This will allow you to make a clean break from a failed business, although your personal credit rating will be impacted negatively for seven years.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


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