How to Reduce Small Business Debt: A Guide for Entrepreneurs

By Jeanna Barrett on
How to Reduce Small Business Debt: A Guide for Entrepreneurs

If you’re an entrepreneur and you have debt, you’re not alone. In a Gallop poll, 36 percent of small business owners said they were uncomfortable with how much debt their businesses carried. Forty-nine percent said they find it extremely difficult to manage their current debt.

Even though certain business models require taking on debt to capitalize on growth opportunities, looming debt can squeeze the joy out of being an entrepreneur.

In this guide we’ll cover strategies for reducing your small business debt, so you can get back into the black and focus more on doing what you love.

Map Out Your Small Business Debt

If you’re trapped in a hole, you need to assess how big the hole is and what tools you have at your disposal before you can devise a plan and make your way out. The same applies when you’re dealing with debt. Ignoring debt won’t make it go away. And in some cases, what feels like overwhelming debt is just disorganized income, or income you haven’t optimized towards paying off debt.

Spend some time with your bookkeeper to identify your total debt, create a monthly budget, and determine how much cash you can allocate to paying off your debt. Together, you can recalibrate your cash flow and identify ways to put more money toward killing your business loans. Common debt reduction strategies include:

  • Creating an essentials-only spending plan that sets up some voluntary austerities until your debt reaches a goal point
  • Setting specific income goals dedicated to paying off debt. This often works best if tied to a specific income stream, such as the pro shop in a martial arts studio.
  • The percentage method, where you dedicate X percent of your profit to paying off extra debt

These strategies can be used for paying down all types of small business debt, but they’ll only be effective if you have your company finances dialed in. If your cash flow is highly variable or you’re unable to stick to a budget, you may end up generating more debt by the end of the month.

Re-Structure Your Debt

Now that you have a clear overview of the debt you owe, it’s time to look for ways to restructure the debt and, if possible, reduce how much you owe.

Identify Loopholes

Being aware of the terms of your loans will help you to pay them down more effectively. For example, if you pay extra on a monthly loan repayment, will that surplus be credited toward future repayments or just deducted from the capital, leaving you on the hook for the full payment next month? This can determine how you apply a temporary cash surplus to killing each of your loans.

Loopholes usually only apply to instalment loans and payments to vendors. Credit cards and lines of credit don’t have structures that make this advantageous.


Negotiate terms with vendors: Can you extend payment terms on any outstanding invoices? Alternatively, can you negotiate a bigger discount for early bird payment on new purchases?

Renegotiate the terms of your loans: This applies both to the initial loan and your relationship with the loan over time. Sending loans to collections represents a huge loss for lenders, which means there’s a chance your lender will be flexible and accommodating about late fees, restructuring payments, and even renegotiating interest. A hardship letter may also help to support your negotiation efforts with creditors.

Although paying on time will always be the best policy, don’t be afraid to pick up the phone and negotiate the terms of your loan. Just be aware that renegotiating the terms of a loan is likely to ding your credit score, so it’s best to use this tactic when you’re not planning to apply for additional credit in the next year or so.

Automate Your Debt Payments

Pay yourself first. In personal finance, this advice is used to encourage you to pay into your savings the instant you receive your salary. The thinking behind the method is that if you wait until the end of the month to save cash, you’ll always find other ways to spend that money. If it’s not available to spend, you make more progress toward your financial goals.

The same method can help you reduce your small business debt. Each time you receive a payment, immediately forward a percentage of the revenue to your lender. Set up an automatic transfer from your bank account so you don’t feel tempted to keep the money in your account.

Debt Consolidation

Debt consolidation is where you take out one large, preferably low-interest loan to pay off several smaller business loans. This can simplify your monthly finances, and generally carries a lower interest rate than other loans. Watch out, though: many of these require collateral or personal guarantees that might add up to uncomfortable risk.

Debt consolidation works well for businesses with multiple small business loans or lots of credit card debt, resulting in high interest or too many debt payments each month. To make sure you get the most out of this method, it’s best to seek the advice from your accountant or a financial advisor before consolidating debt. The key is to make sure this method doesn’t just free up maxed out lines of credit and get yourself in an even bigger hole.

Hire a Debt Restructuring Firm

If restructuring your small business debt is too much to deal with on your own, consider working with a debt restructuring firm. For a fee, they will negotiate with collection agencies and creditors on your behalf in order to extend or change your existing credit agreements.

Up Your Income

Now that you’ve identified and minimized your debt, and you’ve got a repayment plan in place, it’s time to aggressively kill the debt you owe using cash you have on hand. Don’t let overhanging debt dampen your entrepreneurial spirit. The more cash you can generate, the quicker you’ll be able to reduce your small business debt and pay down those lingering loans.

Here are some suggestions to get started on increasing the monthly income to your business.


Can you add an additional product or service to your current offering? Can you diversify your approach to marketing and appeal to other, untapped niche audiences?

Raise Your Prices

Provided you can maintain the same amount of sales, charging more for your products or services is a quick way to increase your income. Before you raises prices, tell your existing customers that prices are going up soon and ask them if they’d like to order anything before the change is in effect. It could result in a bump in revenue.


Is there a way to sell more to your existing clients? Can you offer any incentives or bundle your existing products or services in a way that would entice existing clients to buy more from you? A quick email with a flash sale, a limited offer, or subscriber-only deals, might be all it takes to increase your monthly revenue.

Optimize Inventory Turnover

If stagnant inventory is choking up your cash flow, see if you can adjust your purchasing habits, or look around for suppliers that will offer rights of return for unsold goods.

Work Another Job

Entrepreneur and founder of Exist App, Belle Beth Cooper, recently shared how an oversight in estimated quarterly tax payments resulted in an unexpected $20,000 tax bill at the end of the financial year. She’s taking on additional contract work to meet the payment schedule and pay off the debt. Working a second job isn’t ideal, as it reduces the hours you can spend on your primary business, but it is something to consider in the short-term when you urgently need to reduce small business debt.

Sell Your Surplus

Also known as “liquidating your assets,” this means looking at the things you don’t use – or don’t use to full advantage – and selling them to people who might. Can you sell that unused desk on Craigslist, put equipment from a lapsed initiative up at auction, or find another business to buy a portion of your company you’re no longer passionate about? A warning on this method: do not sell anything you’ve put up for collateral on existing debt. That’s fraud and it has serious legal implications.

Think Laterally

What else can you do to make quick financial gain? Can you lease out a portion of your office to another business? Could you save on rent by working remotely? Let the example of this entrepreneur, who raised $28,000 in startup funds by renting out her bedroom – and her couch – on AirBnB, inspire you to get creative and generate additional revenue from your existing assets.

Above all else, remember that it's okay to feel overwhelmed when you're in debt. Just don’t let it stop you from taking the necessary steps to reduce your small business debt as soon as you can.

Guest author Jeanna Barrett is Head of Inbound & Content Marketing for Kabbage, which pioneered the first financial services data and technology platform to provide fully automated small business loans. Unlike other lenders, Kabbage looks at your business data, not just a credit score, through our fully automated, online application. Kabbage has grown to become the #1 online provider of business working capital and is a Forbes Top 100 Most Promising Company.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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