Business Debt Management: Growth Strategies for Small Business Owners

Entrepreneurs should consider debt as a tool to craft long-term business growth
Careful planning and constant discipline are required when borrowing
We lay out the key leverage tactics and resources small business owners should use to boost their long-term earnings power
Debt can be taboo in the personal finance world. Borrowing too much and being reckless with credit cards indeed makes long-term planning a moot point. For small business owners, however, debt is a weapon to be wielded early and often.

It enables growth, expansion, and flexibility to survive and thrive in a variety of scenarios. Of course, when poorly managed, biting off more borrowed capital than you can chew can erode profitability. Most times, savvy entrepreneurs have a gauge of how much debt to apply so that long-term earnings and higher business value are best realized.

We stress to clients that paying off debt is rarely the right strategy. Rather, using it wisely—to increase cash flow and boost your bottom line—is the aim. Though debt rests on the liabilities side of the balance sheet, let’s explore why it can be your asset to achieving flywheel-like growth no matter the macroeconomic environment.

Why Business Debt Matters

Debt gets a bad rap in today’s society because we usually only hear about the sob stories—the college grad saddled with hundreds of thousands of dollars in student loans, the struggling family that must max out credit cards to make ends meet, and the retiree who has depleted savings and now relies on loans to everyday living.

Yes, over-extending personal finances is a real problem for a chunk of the country, but small business owners who have been at it for a while are broadly more responsible and in better financial shape.

Moreover, many executives we partner with have first-hand experience leveraging up. You may have started out using personal credit or business loans to get your venture off the ground. Often, the shrewdest entrepreneurs are the ones who have called on many forms of debt over the years. When a company grows, new borrowings are layered on—equipment financing, real estate loans, business credit cards, lines of credit, and merchant cash advances—which can complicate a business’s financial plan.

Leverage is a Good Thing!

Each type matters because when appropriately harnessed, business debt has the potential to amplify your profits today and tomorrow. I like to think of it as the small business owner’s vehicle for compounding wealth. Thanks to leverage, profits bear their own profits—much like how an investor can earn interest on their interest to generate compounded returns (the eighth wonder of the world!).

But small businesses face a different set of challenges, and without a clear debt strategy, it’s easy to get thrown off kilter with the pros and cons of borrowing smartly. Effective debt management must include priorities to preserve cash flow, improve creditworthiness, build financial strength, and support long-term growth.

Let’s dive into the key components to building a sturdy debt-finance foundation for your business—the mission is to leverage resources to your advantage.

1. Know Thyself (and Thy Firm)

Let’s get spiritual for a second. The Bible warns of the dangers of borrowing too much and extols the virtue of not going into debt, but it does not forbid it. The truth is that you must borrow responsibly. For folks with whom we work, a mission is to use more debt, not less. That’s counter to Dave Ramsey-style advice, but it works for small business owners who are well-versed in managing cash flow and taking on new projects.

• Knowing thyself also involves taking stock of your current liabilities, including outstanding loans, their interest rates, repayment schedules, covenants and restrictions, and any collateral requirements.
• Some entrepreneurs juggle multiple lines of credit, which can lead to confusion or missed payments—just one hiccup can cast you in a bad light with prospective creditors.
• Keep a detailed tracker of all debts, categorize them, and review them regularly.

Create a centralized schedule, which could be a basic spreadsheet. You want to view all the business obligations in one place. Be sure to include “hidden” obligations like unpaid vendor invoices or deferred payroll taxes.

• Not All Debt is Created Equal

Before using debt for growth, you should optimize your company’s balance sheet. High-interest credit cards or short-term merchant advances can send your weighted average cost of capital (the “WACC”) soaring. You want to bring that down so that investment and capital projects have a lower hurdle rate and higher net present value.

• Pay down high-rate loans early if cash flow allows.
• Consolidate and refinance debt to qualify for better terms.
• Secure low-cost financing as the business matures.

Debt prioritization should be part of a broader capital allocation strategy.

• Play Matchmaker

A trick to mastering cash flow, maximizing ROIs, and overall financial stability is aligning the debt piece of the firm’s capital structure with the assets or expenses being funded. This is classic “asset-liability matching” that you might have once learned about in Corporate Finance 101. A few rules:

• Short-term debt should fund short-term needs (e.g., working capital, seasonal inventory).
• Long-term debt should fund long-term projects (e.g., real estate investments, equipment).

Entrepreneurs can get tripped up when they use long-term financing for temporary cash shortfalls. That’s a recipe for reduced future earnings and a higher WACC. Conversely, leaning on short-term loans for big capex plans leads to constant refinancing or rolling over debt—that can bite if interest rates rise.

• It’s All About Cash Flow

We say it often: “Cash flow is the lifeblood of a small business.” You should use debt to invest in high-ROI projects to boost earnings and maintain ideal cash flow levels. Alongside strategically taking on debt, you can do the following to improve cash flow:

• Tighten receivables with a clear and strict collection process.
• Trim expenses so your company runs efficiently. But while we are all for you running lean, don’t sever growth areas.
• Have access to cash, but don’t hold a massive reserve, as that can be an opportunity cost.

Debt management and cash flow management are of the same ilk. Get both right, and you’re set up for growth.

• Like Your Lenders

Many small business owners are in the people business. Customer and vendor relationships are key; so too is being in the good graces of would-be creditors. As profits rise and you can take on new initiatives, you will want to have a cordial professional relationship with your bank or other lenders. Proactively share your business plan, financials, and goals—especially before applying for new financing or if you anticipate challenges in repayment.

A strong relationship can:

• Improve your chances at loan approval
• Allow you to negotiate better terms, particularly when refinancing
• Help you access liquidity if an unexpected shortfall happens
• Build trust, which can be valuable if and when you seek an exit

Financiers want to help you grow, and they prefer making loans to transparent, organized, and proactive companies—not those who only reach out when there’s a problem.

• Don’t Pierce the Corporate Veil

Though you may be tempted by simplicity or cost, don’t blur the line between personal and business finances. You can quickly put your business at risk if you pierce the corporate veil. Where possible:

• Open separate business accounts
• Avoid personal guarantees
• Incorporate and borrow under the company’s EIN

This separation is best done as early as possible to minimize personal and business regulatory risks as the enterprise expands.

• Monitor Key Debt Metrics

You don’t need a dedicated CFO to handle the books. Keeping tabs on debt levels can be straightforward if you’re organized and have a good beat on the numbers. Here are the important financial ratios:

• Debt-to-Equity Ratio: Measures leverage; what’s owed versus what you own.
• Interest Coverage Ratio: Is interest a small piece or a large chunk of profits? It’s your operating income divided by interest costs.
• Current Ratio: Do you have enough short-term assets to meet short-term liabilities? It’s current assets compared to current liabilities.

With a clear understanding of your leverage and interest costs, you can use debt to fuel growth. It can be like a call option when the right project comes along—earnings can soar when, say, you reach out to a lender, secure a 7% loan, and invest in a 15% ROI initiative.

Debt has the power to preserve equity, comes with tax benefits, and enables faster growth than bootstrapping alone. Discipline is the key.

The Bottom Line

Debt offers opportunities. It’s not a burden, but a lifeline to hitting growth targets and creating an earnings flywheel. Prudence is sometimes required, but viewing debt through a negative lens misses the mark for a burgeoning business. By borrowing, you can diversify your cash flow streams, expand into new markets, reach new client types, and invest in technology to grow at scale.

The upside is enormous. You can partner with Clear Harbor to take your business to the next level. We understand the unique opportunities and challenges small business owners face today, and our financial plans are tailored to you, your business, and your family.