What is the best way to handle business debt in 2025

Why business debt is taking a bigger toll in 2025

So why is business debt taking a bigger toll in 2024 than in recent years? Well, a significant driver is the maturity of post-Covid business loans that were taken out by businesses’. The pandemic hit the economy hard and when governmental support was withdrawn, many businesses resorted to borrowing money in order to survive. 

Many loans come with a 2 -3 years maturity period after which time the borrower has to either repay the money in full, refinance, or switch to a different interest rate – and this is the kicker. In response to the pandemic, the FED reduced the base rate to near-zero levels whereas it now stands at 5.25% – the highest level in decades. 

As businesses that need to refinance, may find themselves paying 500%+ more in interest this time around – that is of course, if they can even secure borrowing in light of reduced lending appetite coupled with new regulation.

The cost of debt

Making money costs money, and owing money costs even more. To offer up an example, let’s say we owned a business that borrowed $100k in 2021 at an annual interest rate of 1%.That works out at a monthly interest payment of $83.33 – a sum that most businesses can comfortably handle. 

However, if we have to refinance to a lender who is now seeking 6% in interest, then the monthly interest shoots up to $500. 

The triple whammy here is that while interest rates have rocketed, the economy has not fully recovered. The cost of living crisis continues to bite and many sectors are still struggling. Therefore the reality is that many will not be able to service a loan of $500+ per month.

It is little wonder that bankruptcy filings surged up 18% in 2023.

Is it possible to operate debt-free?

Most business owners have some form of debt. Whether it’s taking out a small(ish) personal loan to buy a taco truck, or borrowing millions to build a new HQ, business borrowing is a reality of entrepreneurship.

That said, some types of business are more dependent on credit than others and some are able to exist with minimal borrowing. For example, the Taco Truck we mentioned could quite easily operate debt free once the start up costs have been repaid. As long as the owner has cash to buy ingredients and fuel the van, the business can operate.  On the other hand, any business that conducts work “on account” may have to wait months for invoices to come in and so will need to leverage some form of fast, flexible credit in order to pay wages and keep the lights on.

Ultimately, any company that is reluctant to borrow money will usually find that its opportunities to grow are curtailed as rapid growth and scaling are likely to be limited by cash-flow.

As for ‘what kind’ a business should have, there are a few considerations. Firstly, debt vehicles with higher interest rates should be avoided. Classic examples are credit cards which can have APR’s of anywhere between 12% -29%. Unsecured loans also attract higher rates of interest than secured loans.

That said, Some businesses prefer to utilise flexible forms of credit such as credit cards and agreed overdrafts. While the fees and interest rates can be high, they can be drawn down and repaid at any time making them ideal for helping with short-term cash flow issues.  Both credit card and overdrafts are advantageous compared to regular loans in this regard.

The 5 top tips for managing debt

Some types of debt are better for business than others as are some practices for managing that debt.

Here are our best 5 tips for managing a business debt.

• Understand the debt: Keeping a detailed account of all business debts, including amounts, interest rates, and terms is the first step towards successful management. This  is foundational for effective debt management and for identifying refinancing opportunities.
• Improve cash flow: Enhancing a business’s cash flow, through methods such as optimising invoicing can directly impact its ability to manage and repay debt.
• Refinance or consolidate debt: By refinancing high-interest debt or consolidating several debts into one loan with a lower interest rate, a business can reduce monthly payments and interest expenses, making it easier to manage its debt and restore financial confidence.
• Cut costs and increase efficiency: Identifying and implementing cost-cutting measures and reducing operational expenses can free up more funds for debt repayment.
• Recycling debt to pay less interest: This involves periodically reviewing a debt portfolio to take advantage of lower interest rates or better terms through refinancing. The goal is to “recycle” existing debt into new debt with more favourable conditions. For example, this can mean transferring credit card balances from a high-interest card to one with a lower rate, refinancing loans, or renegotiating terms with lenders.

Conclusion

Managing business debt is a critical aspect of ensuring the financial health and sustainability of any business. By understanding their debt, improving cash flow, refinancing or consolidating debt, cutting costs, developing a strategic repayment plan, and recycling debt to pay less interest, businesses can navigate the complexities of debt management more effectively.