What Debt Management Strategy is Right for Your Business?

In its simplest terms, your company needs to spend money if you want it to grow. Opening new locations, paying more employees, purchasing more supplies and any number of other factors can mean that, if your business is in growth mode, you don’t have the option of waiting around to earn enough money to purchase and organize everything you need to help your business live up to its full potential. 

"Debt can even be a good thing,” says Steve Carpenter, Country Director for North America at Creditsafe. “If the lender reports the debt repayments to the credit bureaus, it ultimately helps companies improve their credit score. It demonstrates that they’re capable of paying their debts off on time each month.”

When you decide to take on debt, it isn’t as simple as deciding how much you need and who’s going to give it to you. Your finance team will need to get the full picture of the debt and what it entails. One of those considerations will be the term of the loan. Where short-term debt gives you the option to quickly finance urgent needs, long-term debt is usually used for larger investments. Long-term debt is classed as any debt with a term of 12 months or longer. This includes things like mortgages, commercial loans and corporate bonds.

It may sound obvious, but you can’t take on long-term debt without thinking of the long-term. Are you trying to expand into a new territory, develop a new product or finance a project that will take months or even years to complete? Long-term debt can come with its issues (don’t worry, we’ll get to that in a minute), but if it’s used responsibly, it can help your business level up. 

While everyone has different reasons for securing different loans, you’ll have to think about your specific circumstances when you decide what kind of debt you’re willing to take on. There are benefits to taking on long-term debt compared to short-term debt, but you’ll also find some drawbacks.

In general, taking on long-term debt will give you more borrowing power. Because the repayment terms can stretch for years, rather than months, lender sare more willing to shell out large amounts of money. If you’re hoping to conserve cash flow (and honestly, who isn’t right now?), a long-term loan will often come with smaller, more manageable payments that can be made over a longer period. Lenders can also extend your business these larger, long-term loans with lower interest rates, saving you more money when compared to the high interest rates that often come with short-term debt. 

But you should always remember to look at the big picture of your debt, before and after you take it on. While those interest rates are lower, you’ll almost definitely pay more interest overall than you would for a short-term loan since you have a longer period of time for the loan to accrue interest. 

Timelines should also be considered. Do you need the money right now to fund a specific, time-sensitive project? A long-term loan may not be the right option for your business. Long-term loans are more difficult to qualify for and subject to more approvals and robust credit checks, so the process will almost certainly be more time consuming than with short-term loans. 

According to Steve, “Taking on too much debt can be the downfall of a small company. If there’s a market downturn or their sales drop, they have to prioritize paying back their debt – maybe at the expense of paying suppliers late.” 

Realizing that you’re overleveraged is the first step in addressing the problem. Once you see the warning signs, you can act quickly to help your company out of debt. 

Quite simply, if you don’t have the cash flow to pay your debt and your suppliers on time, your business is overleveraged. 

If you’ve determined your business is overleveraged, you need to act before it’s too late. Thankfully, being overleveraged isn’t the end of the world – it's just a sign of bad things to come if you don’t find a way out. 

There are several debt management strategies you can consider when you’re worried about your company’s debt, but none of them are a one-size-fits-all solution. It’s important to think about the nature of your debt – when payments are due, who the loans are with, what they’re funding and the general health of your own cash flow. 

In our study, 84% of respondents said they’d pursue debt consolidation if they needed to avoid financial trouble, with 54% of businesses indicating they would pursue restructuring if their businesses were declining in revenue and profitability. A further 31% of businesses would restructure if they were facing liquidity problems. In the last 12 months, 60% of the businesses in our study have refinanced debt, pointing to the fact that companies are being impacted by the effects of rising inflation and higher operating costs.

Let’s look at the main debt management strategies you can take into consideration when you look at your company’s debt. 

What it is: Debt consolidation combines all of your loans from different lenders into one single, larger debt. Rather than paying off several loans, which likely all have different maturity dates and interest rates, you can then make one payment to the consolidation company.

Who it’s right for: If your long-term debt feels overwhelming, consolidation may be the right option for you. It can be easier to budget, both in the long and short term, when you only have to worry about making one payment for all of your debt. However, if the consolidation loan you’re approved for is less than the total amount of your debt, you should look into other options. It won’t make sense to consolidate only a portion of your long-term debt. 

What it is: Debt negotiation involves speaking with lenders to re-determine the terms of your initial loan. If, for example, you’re not able to pay the full owed amount, you may be able to negotiate a different payment schedule that involves making smaller payments over a longer period of time, or at a higher interest rate.

Who it’s right for: If you have a history of on-time payments and a good relationship with your creditors, debt negotiation may be an option for your business. It’s much easier to negotiate debt well before it becomes a problem. For example, if you approach your lender asking for a lower interest rate as soon as you’ve noticed you’re struggling to maintain your payments, they may look at your good history and negotiate with you favorably. On the other hand, if you’re already late on your payments and your credit score and relationship with the lender has struggled, the risk to the lender could be too high and they’ll be less inclined to do you a favor. 

What it is: Refinancing means taking out a loan to pay off a different loan. While that may seem pointless or counterintuitive at first glance, refinancing gives you the opportunity to find a loan structure that better suits your needs. The new loan could have a lower interest rate, a lower monthly payment amount or a different repayment term that makes more sense for your business.

Who it’s right for: If your business is continuing to expand, or has high customer demand, you might consider refinancing your debt to access more capital. Refinancing can give you additional funding beyond your existing debts, which can make it an attractive option.But if interest rates have risen since you took out the initial loan, refinancing likely won’t be the best option – you might end up with even more debt than you originally took on. For example, Costco recently said they’re considering paying a $1 billion debt in cash rather than refinancing to avoid high interest rates. 

What it is: Debt settlement involves two parties – you and your lender – working together to come to an agreement that will satisfy the lender. In essence, you offer a single, lump-sum payment to the lender that’s lower than the total amount that you owe in exchange for the lender writing off the rest of the loan. Lenders agree to settle debts when they know there’s little chance they’ll get the whole amount owed. 

Who it’s right for: On the surface, debt settlement sounds like a great idea. Who wouldn’t want to simply pay less money than they owe on their debt? But it isn’t quite so simple. You’ll likely work with a debt settlement company, who will negotiate the terms of the “full and final settlement” (meaning your lenders understand the payment will be the last one you make, in exchange for them writing off the rest) on your behalf. The debt settlement company will charge a fee on top of what you’ll have to pay to your lenders and the IRS may also tax you on the forgiven debt amount. 

What it is: Arguably the most complicated option, debt restructuring involves working with lenders to change the terms of your existing loans. You may ask for them to lower your interest rates, push your repayment date further into the future, or both, depending on the severity of your financial issues. The goal of debt restructuring is for your company to regain liquidity so that you can continue operating. 

Who it’s right for: Usually, this is a last resort option, with the alternative being bankruptcy. You shouldn’t go into restructuring lightly. It often involves lengthy, complicated processes and can even include laying off workers or closing locations, depending on the nature of your business. In 2023, Tupperware announced a restructuring plan that included reducing their amortization payments by $55 million through 2025. Mariela Matute, CFO of Tupperware Brands Corporation, said at the time, “I am confident that this agreement provides us with the financial flexibility to continue executing on our near-term turnaround efforts as well as our long-term strategy to create a global omni-channel consumer brand.”