Most Canadians do not start their small businesses when they are flush with cash to invest (or burn, as the case may be). Therefore, debt is often a necessary tool for small businesses to launch, maintain or expand their operations. According to a Government of Canada report[1] which analyzed trends for Canadian small businesses (i.e., businesses with 1-99 employees) from 2009-2022, the two most common reasons that small businesses seek out external debt financing are to support day-to-day working and operational capital expenditures or to purchase and/or maintain fixed assets. Other reasons may include to purchase or expand a business, to enter a new market, to fund research and development, and to consolidate debts. All these reasons, but perhaps to a lesser extent the last mentioned, can have positive connotations in respect of the outlook for the business.
Debt management is a key subset of capital management, and the effective management of capital can help turn a good idea into a great business. Many small businesses are owned and operated by single persons, families or small groups of people, with management similarly being single persons or small groups of people that are tasked with managing all facets of their small business. Very few entrepreneurs are strong in every aspect of managing a business. Poor debt management practices can cause or compound stress and strife not only on the business’ quantitative performance but also on the ability to efficiently manage qualitative aspects of the business. This article identifies five debt management strategies for small businesses.
1. C.R.E.A.M.[2] (Cashflow Rules Everything Around Me)
A cashflow forecast is an essential tool for every small business. Even a rudimentary forecast should help any business plan out its best use of projected available cash, including when cash will be available to pay down debts and when debt positions must be expanded to cover cash shortages. Consider whether the management team have the skills to prepare an adequate cashflow forecast or if the business would benefit from hiring an external consultant to assist with preparing a fully integrated forecast model of cashflows and financial statements.
Once there is a forecast model, management should track the variances between projections and actual results, otherwise the model is just a brain exercise. Test your assumptions and update the projections regularly for realism, not optimism. Simply put, a business should not spend more than it can earn. The better one can predict a cashflow, the better the business will be able to manage its debt.
2. Get your Priorities Straight
Once there is a cashflow forecast available, management should make a list of the outstanding debts of the business and the relevant details, such as interest rates, due dates, minimum payment requirements, and maturity dates. Once all that information is organized, rank those debts by their interest rates and payment due dates. Flag the accounts of critical suppliers where non-payment or late payments will have detrimental effects on the business’ ability to operate. After accounting for monthly minimum payments, focus on paying off the higher-interest debts with available cash. The business may not feel relief right away, but this practice will optimize the overall cost of borrowing over time.
3. Refresh the Page
When determining an appropriate debt management strategy for a small business, consider the needs identified in the forecast model, the business plan, and its recent financial history. Small businesses should not hesitate to change tact if they are not getting the desired results and there is no expectation of achieving those results.
Management should be diligent and research options to refinance existing debts. There may be options available to lower the average or overall interest rate, amortize the debt over a longer period to improve cashflow, or even consolidate to a fixed payment schedule and interest rate to simplify a debt repayment schedule and better predict regular cash outflows.
Also, small businesses should not be afraid to take a shot at renegotiating terms with individual creditors. Small businesses often develop personal relationships with their business partners, including suppliers, bankers, lenders and others. By keeping the lines of communication open, and operating transparently and with good faith, creditors may be more open to listening to proposals for addressing outstanding debt.
4. B.C.B.A.B.C. (Always Be Closing[3] But Also Be Cost-cutting)
Borrowing and slightly modifying another popular acronym for this obvious but important arithmetic debt management strategy: Make more, spend less. For the sake of this article, however, let us focus more on the latter.
Cutting costs can improve margins and free up cash for debt repayment. Small businesses should monitor their costs closely and consider: (a) cutting non-essential spending; (b) reorganizing and optimizing fixed overhead costs; (c) renegotiating supplier contracts; and/or (d) refinancing existing debt with cheaper debt. Small business owners must also, however, consider the effects of expense reduction on efficiency, productivity, staff morale and quality.
5. Make the Tough Choices
Small business owners are often tasked with making difficult decisions in relation to their operations, but especially when it comes to debt management strategies. Small business owners and management often have emotional attachments to their businesses or aspects of their business, which can lead to emotional reactions that ignore practicality. The most logical and practical decision is often not the most appetizing decision. Such unattractive options may include, but are not limited to: (a) selling obsolete or under-utilized assets; (b) dropping low margin or underperforming business contracts or product lines; (c) paring down the business’ footprint or staffing to adjust to current conditions; (d) recapitalizing the business through personal advances or investment; (e) diluting ownership through third-party investment; (f) restructuring the business through formal reorganization or insolvency proceedings; or (f) divestment of the business through a sale, wind up, or bankruptcy.
Managing debt is a significant challenge for many small businesses in Canada. Access to good quality information and analysis is critical for small business owners and operators to be able to affect positive change for their businesses. Without proper inputs and analysis, debt management strategies will not take shape. Seeking assistance from a professional with respect to your debt management strategy can help you manifest that great business out of your good idea.
[1] Small Business Credit Condition Trends. Small Business Branch, Research and Analysis Directorate, Innovation, Science and Economic Development Canada, 2023; https://ised-isde.canada.ca/site/sme-research-statistics/en/survey-data-and-analysis/credit-conditions-survey/small-business-credit-condition-trends-2009-2022; accessed April 15, 2025.
[2] Smith, Jr., Clifford (aka Method Man), rapper. “C.R.E.A.M.” Enter the Wu-Tang (36 Chambers), by Wu-Tang Clan. Loud Records and RCA Records, 1993. Apologies for the liberal use and revision to the acronym.
[3] Glengarry Glen Ross. Directed by James Foley, screenplay by David Mamet, New Line Cinema, 1992. YouTube, uploaded by John Doe, 29 August 2015, https://youtu.be/GrhSLf0I-HM?si=k-_u8Mocx6XJM5xv.