Best Practices for Managing Business Debt: What to Do and What to Avoid
“In any moment of decision, the best thing you can do is the right thing, the next best thing you can do is the wrong thing, and the worst thing you can do is nothing.”
-Theodore Roosevelt
“Best Practices for Managing Business Debt: What to Do and What to Avoid”
Effectively handling business debt is essential for your company's stability, expansion, and long-term financial well-being.
Bad debt management can lead to unnecessary financial strain, credit damage, and even business failure.
Smart debt management, on the other hand, ensures that your company remains stable, creditworthy, and positioned for future opportunities.
Below is a clear-cut guide on what to do—and more importantly, what NOT to do—when managing your business debt…
What NOT to Do When Managing Business Debt
1. Do NOT Stop Payments to Creditors
Stopping payments to your creditors is one of the worst mistakes a business can make. It leads to late fees, penalties, increased interest rates, legal action, and potential lawsuits. Even if cash flow is tight, keeping up with payments—or at least negotiating a revised payment plan—is essential.
2. Do NOT Escrow Payments
Some companies or advisors may suggest escrowing payments to "force" creditors into negotiations or settlements. This is a dangerous and unnecessary strategy that often backfires. Creditors are under no obligation to accept funds in escrow, and this tactic can lead to damaged business relationships, collections, or lawsuits.
3. Do NOT Use Debt Settlement Companies
Debt settlement companies promise to negotiate lower balances for you, but at a steep cost. These companies:
Charge excessive fees
Ask you to stop paying creditors, which destroys your business credit
Offer no guarantees, often leaving businesses worse off
Instead of trusting a third-party company that profits from your distress, it’s better to negotiate with creditors directly or seek help from a legitimate business advisor.
4. Do NOT Pay Anyone Except Your Creditors Directly
There is no valid reason to route payments through a third party. Always pay your creditors directly to avoid fraud, scams, and unnecessary delays.
If someone claims they can "handle" your payments for you, run the other way—these schemes often lead to misallocated funds, missed payments, and financial disasters.
5. Do NOT Rely on the Promise of a Refinance
Many businesses fall into the trap of banking on a refinance to solve their debt issues. The reality? Refinancing is never guaranteed.
Lenders may reject your application due to financial instability.
New loans may come with higher costs, prepayment penalties, or personal guarantees.
If you don’t fix your cash flow issues, a refinance is just a temporary Band-Aid.
Instead of waiting for a refinancing miracle, take proactive steps to improve debt management NOW.
What TO DO for Smart Business Debt Management
1. DO Check Business Loan Affordability
Before taking on any debt, ask yourself: Can my business truly afford this loan?
Calculate your monthly debt payments and ensure they fit within your operating budget.
Factor in interest rates, loan fees, and repayment terms before signing anything.
Be realistic about your revenue and cash flow projections.
A loan that seems “affordable” today could quickly become a burden if your revenues decline or expenses increase.
2. DO Shop for the Longest Payback Term
Short-term loans with high payments choke your cash flow and can lead to financial distress. Always look for:
✅ Longer payback periods to lower monthly payments
✅ Loans with flexible repayment options
✅ Lenders that allow early repayment without penalties
A 10-year loan with a reasonable rate is far better than a high-cost, short-term loan that drains your cash reserves.
3. DO Shop for the Lowest Interest Rates
Not all business loans are created equal. Some lenders charge predatory interest rates, making it nearly impossible to repay the debt without getting trapped in a cycle of refinancing.
Compare multiple loan offers.
Look for low APR (annual percentage rate) rather than just “low monthly payments.”
Watch out for hidden fees, prepayment penalties, and deceptive terms.
The cheaper the debt, the easier it is to manage—so take the time to find the best deal.
4. DO Renegotiate Creditor Offers
Creditors want to be paid, and many will be willing to work with you if you communicate early and negotiate smartly.
Ask for extended payment terms to ease cash flow pressure.
Request interest rate reductions if your financial situation has changed.
Consider consolidation if it helps lower overall payments.
The key? Negotiate BEFORE you’re in financial distress. Creditors are more likely to work with you when they see you as proactive rather than a high-risk borrower.
5. DO Build an Emergency Cash Reserve
One of the biggest reasons businesses fall into debt traps is the lack of cash reserves. To avoid dependency on loans, build an emergency fund by:
Cutting unnecessary expenses
Setting aside a percentage of monthly revenue
Diversifying income sources to stabilize cash flow
6. DO Improve Business Financial Health
Healthy finances make it easier to manage debt effectively. Focus on:
Increasing revenue streams to avoid over-reliance on loans
Monitoring cash flow regularly to detect issues early
Keeping financial records organized to simplify loan applications and refinancing options
7. DO Work with a Business Finance Expert
Many business owners struggle with debt management because they lack the expertise to navigate financial complexities. A business finance advisor can:
Help restructure existing debt for better terms
Provide strategies for improving cash flow
Assist with negotiations to ensure creditors offer the best options
Final Thoughts: Take Control of Your Business Debt Today
Managing business debt isn’t just about keeping up with payments—it’s about making strategic financial decisions that protect your business’s future.
Avoid the costly mistakes of stopping payments, relying on refinancing, or trusting third-party settlement companies — Instead, focus on securing affordable, long-term financing, negotiating with creditors, and protecting your cash flow.
If you manage debt wisely, your business will remain financially strong, creditworthy, and positioned for long-term success.
Don’t wait for the situation to get worse
The sooner you act, the more options you’ll have. Schedule a consultation today and take the first step toward saving your business—and your future.
Remember, more business debt isn’t the answer. A more effective business strategy is.
Click to setup an introduction meeting to discuss your situation and next best steps.
Bernarsky Advisors
Business Finance and Strategy Advice
Refinance. Restructure. Reorganize.
(See more of our articles about Business Finance and Strategy below…)
WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH HIGH BUSINESS DEBT PAYMENTS?
It is NOT by stopping ACH payments.
It is NOT by taking on another business loan.
It is NOT ALWAYS a Refinancing
It is NOT by entering into a debt settlement program.
Find out the BEST strategies to get your Business back to where it was