How to Manage Debt in Your Business: Practical Tips for SMEs

Debt is often a double-edged sword for small and medium-sized enterprises (SMEs). On one hand, it provides the capital needed to grow your operations, invest in equipment, hire talent, or manage cash flow during lean periods. On the other hand, if not handled correctly, debt can spiral out of control, stifling growth and even threatening the survival of your business.

The key is not to avoid debt entirely debt can be a powerful financial tool but to manage it strategically. In this guide, we’ll explore practical tips that SMEs can use to control their debt, reduce financial stress, and maintain a healthy cash flow.

1. Understand Your Debt Landscape

The first step in managing debt effectively is to have a clear picture of what you owe. Many SMEs make the mistake of focusing only on monthly payments without understanding the full scope of their debt. This lack of clarity can lead to missed payments, penalties, and financial stress.

Steps to understand your debt:

List all debts: Include bank loans, cooperative loans, credit card balances, vendor credit, and even informal borrowings.
Track interest rates and terms: Knowing which debts carry the highest interest or strictest terms helps you prioritize payments.
Use tools for tracking: Spreadsheets are simple and effective, but accounting software like QuickBooks, Xero, or Zoho Books can automate reminders and provide a clearer overview.

Why it matters: When you know exactly what you owe, you can plan strategically, negotiate effectively with lenders, and make informed financial decisions.

2. Prioritize High-Interest Debts

Not all debts are created equal. Some come with higher interest rates, which can accumulate rapidly and drain your cash flow if left unchecked. Prioritizing these high-interest debts is critical for keeping your financial health intact.

‍How to prioritize effectively:

Identify debts with the highest interest rates. Credit cards and informal loans often top the list.
Allocate extra payments to these debts while maintaining minimum payments on lower-interest obligations.
Consider the snowball method for motivation: paying off smaller debts first can provide psychological wins, but mathematically, paying high-interest debts first is more cost-effective.

Example: If your business has a 15% interest credit card debt and a 7% bank loan, paying off the credit card first saves money in the long term and reduces stress.

3. Negotiate with Lenders

SMEs often hesitate to approach lenders when financial strain occurs, fearing rejection or damaging relationships. The truth is, proactive communication with lenders can often result in flexible arrangements that keep your business afloat.

‍Options to discuss with lenders:

Loan restructuring: Adjust the repayment schedule to lower monthly obligations temporarily.
Interest rate reduction: Some banks may offer lower interest rates for businesses with a good repayment history.
Payment holidays: Short-term suspension of repayments can give your business breathing room during lean periods.

4. Avoid Using New Loans to Pay Old Ones

The temptation to take on new debt to cover existing obligations is common, but it often leads to a debt trap. Essentially, your business ends up borrowing to pay interest, not to grow.

‍Safer alternatives:

Cost reduction: Review operational expenses and cut non-essential costs.
Increase receivables: Encourage faster payments from clients through early payment discounts or more stringent invoicing.
Supplier negotiation: Ask for extended payment terms or bulk discounts.

Example: Instead of taking another loan to pay an overdue supplier invoice, you could negotiate an extended payment schedule while improving cash inflow from clients. This approach strengthens relationships and maintains financial control.

5. Build a Realistic Repayment Plan

A debt repayment plan tailored to your business’s cash flow is essential. Without aligning repayments to actual revenue cycles, even small debts can become unmanageable.

‍Steps to create a repayment plan:

Forecast revenues and expenses: Understand seasonal fluctuations in cash flow.
Set repayment priorities: Use the high-interest-first approach or a combination with smaller debts for motivation.
Determine affordable monthly payments: Ensure that repayments do not compromise day-to-day operations.
Track progress regularly: Update your plan monthly or quarterly to adjust for revenue changes.

Tip: Automate payments where possible to avoid late fees and maintain a healthy credit record.

6. Monitor Cash Flow Closely

Cash flow is the lifeblood of any business. Even profitable companies can struggle if cash is tied up in receivables or mismanaged. Closely monitoring cash flow helps you anticipate financial gaps before they escalate.

‍Practical tips for cash flow management:

Maintain a cash flow statement and update it weekly.
Keep a cash buffer for unexpected expenses.
Avoid unnecessary large expenditures when debt levels are high.

Insight: Predicting cash flow problems early allows you to renegotiate terms, delay non-critical spending, or focus on faster revenue generation.

7. Use Debt Strategically for Growth

Debt isn’t inherently bad; it becomes a tool when used strategically. Smart borrowing allows SMEs to scale operations, invest in technology, hire talent, or expand markets.

‍When debt is strategic:

Financing equipment that increases productivity.
Funding marketing campaigns with measurable ROI.
Bridging short-term cash flow gaps in seasonal industries.

Caution: Avoid taking on debt for non-essential purchases or speculative ventures. The goal is to ensure that debt contributes to business growth rather than creating financial strain.

8. Seek Professional Guidance

Managing business debt can be complex, especially when multiple creditors and high-interest rates are involved. Financial advisors or accountants can provide objective advice, help negotiate with lenders, and create debt management strategies.

‍Options for SMEs:

Accountants or bookkeepers: Help organize debt, monitor cash flow, and prepare forecasts.
Financial consultants: Offer advice on restructuring, repayment strategies, and long-term financial planning.
SME support organizations: Many local chambers of commerce or government programs offer financial guidance for small businesses.

Benefit: Professional guidance reduces errors, improves decision-making, and can save your business money in the long run.

9. Implement Cost Control Measures

Managing debt is easier when expenses are kept under control. Look at your operational costs critically and identify areas where savings are possible.

‍Common strategies:

Renegotiate supplier contracts to reduce costs.
Outsource non-core functions like IT or payroll to save on staffing costs.
Adopt energy-saving measures to cut utility bills.

Even small savings can free up funds for debt repayment and reduce overall financial stress.

10. Keep Communication Transparent Within Your Team

If your business has partners, investors, or key employees, maintaining transparency about debt levels and repayment plans is crucial. Everyone should understand the financial strategy and their role in implementing it.

‍Ways to maintain transparency:

Share monthly financial summaries with key stakeholders.
Involve team members in cost-saving initiatives.
Encourage a culture of accountability and responsibility.

Outcome: A well-informed team contributes to financial discipline and helps avoid surprises.

Final Thoughts

Managing debt isn’t about avoiding it entirely, it's about using it wisely. For SMEs, the difference between growth and financial strain often comes down to disciplined debt management, strategic borrowing, and proactive planning.

Here’s the core takeaway:

Know your debts: Understand what you owe, to whom, and when.
Prioritize effectively: Attack high-interest debts first and plan repayments around cash flow.
Communicate and negotiate: Don’t shy away from lenders if flexibility is needed.
Avoid debt traps: Don’t use new loans to pay old debts.
Use debt strategically: Ensure borrowing contributes to growth.
Seek guidance: Professional advice can save money and stress.

With these strategies, SMEs can maintain financial stability, reduce stress, and even leverage debt as a tool for growth. A smart approach to debt ensures that your business stays on solid financial ground, ready to seize opportunities when they arise

Partner with G.P. Rajbahak & Co. for Expert Financial Guidance

Navigating debt management and financial planning can be complex. G.P. Rajbahak & Co., a distinguished Chartered Accountancy firm based in Kathmandu, Nepal, offers expert services to help SMEs manage their finances effectively. With over 25 years of experience, GPR provides tailored solutions in auditing, taxation, business strategy, and corporate finance to ensure your business remains on solid financial ground.

Visit www.gpr.com.np to learn more about their services and how they can assist your business in achieving sustainable growth.