Dealing With Debt as a Business Owner

Most small business owners have seen tough times the past couple of years, dealing with dramatic and rapid changes in the wake of COVID and other economic events. According to data from Innovation, Science and Economic Development Canada, roughly 65 percent of new companies in Canada survive their first five years in business — and that data was from before the upheaval of 2020.

Small and family-owned businesses are almost guaranteed to take on business debt as a survival mechanism, or as a tool to grow and expand, especially in the early stages. While taking on business debt is not inherently bad, like all debt, you must approach it from a prudent and practical standpoint.

Why take on business debt

The reason most businesses take on debt is because they want to open up new opportunities for revenue, profit, or efficiency in the future.

Ideally, a manageable amount of debt in your business will help you build a positive business credit profile, just like responsibly using a personal credit card can help you build good credit. The payoff is that lenders will give you more favourable terms if you are disciplined with credit.

The fundamentals remain the same in business as with personal debt. Relying on it too much can result in cash-flow difficulties, and unhealthy cash flow is the primary reason small businesses fail. If you’re unsure of the best uses or amounts of debt for your business, you can seek advice from qualified professionals.

Business credit score

As a small business owner, you may not think of your business’ credit score as often as your personal credit score, if at all. But so long as your business is registered and you have bank accounts attached to it, you do have a business credit score, and it is worth paying attention to.

It behaves in a similar way to your personal credit score; you can build a positive or negative credit profile. Paying down debt early and often, paying more than just the minimum, and cutting costs where you can, will improve your score and benefit you in the long term.

MNP is here to help

As a small business owner, we know that the financial performance of your business is inseparably linked to your personal prosperity. If your business has struggled with cash flow or is approaching insolvency because of the burden of debt, we can help. Book a free consultation with MNP’s Licensed Insolvency Trustees and we can walk you through the best options for financial recovery.