Ask Us How: Managing Debt

Posted by Michael Derin

Published on October 16, 2013 under NSW Business Chamber Partnership

Debt need not be risky. If you manage it effectively you can use it to grow your business and boost your working capital. But if you let it get out of control you could make your business vulnerable to failure and even leave yourself open to personal liability.


To manage debt well you need to be sure that your assets meet your liabilities, that you have strong cash flow in place, and that you’re capable of thinking through the risks involved in over extending your business.

You should also have in place contingencies for events that are out of your control. These could include natural disasters like floods or fires. It could also be less sensational developments like changes in consumer behavior or increase market competition. Factors such as these can have a serious impact on your business cash flow and ability to service loans. The best advice is to have a cash reserve large enough to cover essential expenses, including loan repayments for at least three months.

If those cash reserves are insufficient, you could find yourself personally liable for debt owed by your business. A good working relationship with your bank manger is essential. If your bank manger is confident of your ability to run the company profitably and believes that your business is in good overall shape, they will be much more likely to work with you to overcome short-term liquidity problems.

Some other tips to reduce your debt include:

Review interest rates - If the interest rate on your small-business loan is significantly higher than current rates, consider refinancing to obtain a loan with lower monthly payments. Before meeting with a lender, review your credit report to make sure there are no blemishes. A higher credit score is an indication of successful financial management.

Negotiate with suppliers - Don't hesitate to ask suppliers for discounts, especially if you order in bulk. Draw on your good payment history or on quotes from other suppliers when negotiating flexible or extended payment terms with suppliers. Consider partnering with other small-business owners to make bulk purchases at lower prices.

Rethink space - If you are not using all of your square footage, consider subleasing unused space. If you can downsize on space to lower your rent, you may want to ask your banker if he or she knows of clients who are seeking to rent additional space.


One way to strengthen the relationship between you and your bank is to identify what information they see as vital to the health of your loan. Usually that will be stipulated in the loan covenants. (Covenants are conditions put on the loan by the bank; restrictions such as minimum levels of liquidity and cash flow.

If you’re failing to comply with any of the covenants, you could be considered in default of your loan). All the same, it’s a good idea to ask your bank manger about it directly to ensure that you’re providing the right kind of information in a format that can be easily interpreted.

Before you forward the information, review it thoroughly to ensure you haven’t breached any of the bank’s covenants. Broken covenants are a valuable signal to you that there are serious issues emerging within the business; take care to address these before your bank completes the next quarterly or annual review.

Inevitably, in a typical small business, payments will be missed and forecasts will be off target. When these issues arise, make that first phone call to your bank to discuss what is happening with your business flow. Keep them informed so that the bank knows you consider the relationship important and to get valued feedback. Even if you can deal with the matter yourself, sharing your challenges will strengthen that partner relationship.

Relationships are important for all parts of your business; the relationships with your vendors, suppliers, partners, employees and customers are all vital. But one of the first relationships you need to solidify is the one with your bank. Since lack of capital is one of the top 3 reasons businesses fail, you want to build a strong alliance with your source of capital. They may not be able to supply all the funding you need for every situation but they will always be a cornerstone for your daily operations and financial stability. Build your relationship early on and enjoy the benefits throughout the life of your business.


Effective debt management also involves a bit of foresight when it comes to potential interest rate rises. Before you take on a loan it’s important that you calculate the interest rate threshold the business can afford. Once the loan is in place, ensure you account for possible rate increases in your forecasts. Looking at the inflation outlooks published by the Reserve Bank of Australia ( will help you predict increases when inflation is on the rise it’s likely that the Reserve Bank will be considering rate increases.

When interest rates are going up, one way to deal with increasing loan repayments is to refinance your debt levels. This might involve taking the loan to another financial institution with lower rates, consolidating smaller loans where possible so that you’re only paying interest on a single sum of money, or exploring other, more complex lending products. If you do decide to refinance, think about how the loan can be structured for maximum tax effectiveness; a financial advisor or accountant should be able to give you the advice you need.

Don’t be daunted by debt. Instead, become an active manager of your liabilities. Maintain a realistic view of what you can and head off problems before they occur. You’ll soon find that you can make debt work for you, supporting your business as it grows.

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