How do I handle debt in my business?

While many people have debt in their personal finances, several entrepreneurs also have business debt

Published on:
August 2021

While many people have debt in their personal finances, several entrepreneurs also have business debt. So how should you handle those debts? Is it the same as personal? Should you follow a debt payoff plan, and if so, which one? This is a very broad question because there are several factors in how I would realistically answer it. For example, are you a sole proprietor or the owner of a C-Corp? And are you the only owner of your business or do you have a partner or partners? These are questions to consider when deciding how you should handle the debt in your business. 

Since there are so many outcomes to this, I wanted to go over a few things that will help you possibly make a decision or have some more knowledge of how to move forward. But keep in mind that these are my suggestions based on a theory not knowing your precise situation so also take some of it with a grain of salt. If you are a sole proprietor/single member LLC, meaning you claim your business on a Schedule C for taxes, you are solely responsible for this debt. There are two things that you can do depending on your situation and what makes more sense to you: 1) you can use your business revenue to help pay off the debt, or 2) you can add it to any possibly personal debt and include it with your game plan to pay off. Either way works as long as you’re making the minimum payments. And if you choose number 2, be sure that you are tracking it properly in your books as it was a business expense and your personal income may be investing back into the business. Once you decide on this, then you’ll need a game plan to pay it off. Since everyone’s personal finances are so different, I’ll focus on the first option to pay using your business revenue. 

Let’s say you have multiple partners in the business (not just you), then you are all responsible for the debt, but the way you pay it may differ. In this situation, you should come together as a team to decide how your debts should be paid and who will enforce it (is it a partner or your bookkeeper?). This is where things can get tricky as some may have different opinions as to how you should (or if you should) pay off your business debts, and that may be when you bring in a third party such as a financial coach or your CPA. Once you’re all on the same page, then there are several ways to handle paying off the debt.

When you get paid for your products and/or services, you need to make sure that the minimum payment towards your business debt is covered in your Operating Expenses (which should be budgeted for). As for what you pay beyond that will depend on what type of debt and how it was used for the business. Was it the mortgage to buy the building you’re in or a loan from SBA to help with costs during COVID times (of which many of us know all too well unfortunately). You need to make a list of all debts you have in your business (credit cards, loans, loan on credit, mortgage, auto loans, etc). As there are many strategies out there, the most common is the debt snowball - paying the lowest balance first. One way to add to your minimum payments is to use your profit earned from the month (or quarter, however often you track it), and use a portion of it to apply towards your debt game plan. Mike Michalowicz does an excellent job in his book Profit First explaining how to do this too.

Ultimately, it comes down to determining who is responsible for paying the debt, coming up with a strategic game plan to pay it off, and putting the plan into action. And once you have all of these determined, you can focus more on building your business and helping your clients/customers, as your debt aspect of the finances are being handled. Now if you need further help with making these decisions, feel free to reach out and I can help you come up with that plan and an easier way to implement it. Depending on your type of business, it may be difficult to not go into debt (such as a dentist). However, just because you are a business owner does not mean you need to go into debt if you have the funds or the purchase from the debt is not needed or won’t provide enough value for your business to grow in a timely manner to offset the debt. To be clear, I’m not saying debt is bad or good, just that it depends.

About the author

Jennifer Perez

As a Profit Strategist, Jennifer helps business owners implement a cash flow management system which guarantees the business' profitability, ensures owners are compensated fairly and that they never have to worry about making tax payments again.

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