Borrowing can be a powerful tool for growing a business — but like any tool, its impact depends on how it’s used. The right amount of debt can help your company expand, stabilize cash flow, or invest in new opportunities. Too much, however, can threaten your survival. The challenge for every business owner is determining what a “healthy” level of debt looks like and how to manage it wisely.
This guide explores what constitutes good versus bad business debt, how to assess your company’s borrowing health, and what to do if you’re overwhelmed by debt.
What Business Debt Really Means
Business debt refers to any money your company owes and must eventually repay. It could be a bank loan, unpaid supplier invoice, business credit card balance, or financing from investors. Debt itself isn’t the problem — in fact, most businesses rely on it to fund operations, pay employees, or purchase inventory. The problem begins when borrowing exceeds your company’s ability to repay or doesn’t serve a clear business purpose.
Entrepreneurs often fall into two categories: those who fear debt entirely and those who take on too much of it too quickly. Both extremes can be harmful. The goal is balance — borrowing only when it creates measurable value for your business.
Business financing can take many forms. Some loans fund equipment that generates new revenue, while others help bridge short-term cash flow gaps. Understanding which type of debt your business is taking on — and why — is the first step to staying financially healthy.
The Difference Between Good and Bad Business Debt
Not all debt is created equal. “Good” debt is strategic — it supports activities that help the business grow, increase efficiency, or boost profitability. “Bad” debt, on the other hand, drains resources without contributing to long-term success.
Examples of good business debt include:
- Taking a loan to buy equipment that increases production.
- Financing inventory to meet seasonal demand.
- Borrowing to open a second location after steady growth.
- Applying for a government-backed loan with low interest and favorable terms.
These forms of debt typically have a clear purpose and measurable return on investment. They’re calculated risks — and when managed well, they accelerate growth.
Examples of bad business debt include:
- Borrowing to cover ongoing losses with no plan for profitability.
- Taking on loans without understanding repayment terms.
- Using high-interest credit cards for nonessential expenses.
- Making loans to clients or employees without proper guarantees.
This type of borrowing drains cash flow and can trap a business in a cycle of debt. Even if intentions are good, poor financial discipline can quickly turn a manageable situation into a crisis.
How Much Debt Is Too Much?
There’s no universal figure that defines “healthy” business debt. What’s reasonable for one company might be risky for another. However, financial professionals often refer to a debt ratio to assess borrowing health.
Your debt ratio measures how much of your business is financed through debt compared to equity. A ratio between 30% and 60% is generally considered sustainable for small businesses. Above 60%, lenders may view your company as a higher risk.
A healthy level of debt depends on several factors:
- Industry: Capital-intensive sectors like manufacturing or transport can handle higher debt loads than service-based businesses.
- Cash flow stability: Businesses with predictable income streams can manage larger repayments.
- Growth potential: Startups in expansion mode may temporarily carry higher debt as they build capacity.
The key is not how much you owe, but how effectively that borrowing supports growth. Before taking on new debt, ask yourself: Will this investment generate enough returns to justify the cost? If the answer is unclear, it may be time to rethink your strategy.
How to Manage Debt Wisely
A healthy approach to debt begins with planning. Business owners should align every borrowing decision with clear financial goals and repayment capacity. Here are essential steps to guide you:
1. Develop a Clear Financial Plan
Before borrowing, identify the exact purpose of the loan. Will it fund a specific project or support general operations? Create a repayment plan that includes best- and worst-case cash flow scenarios.
2. Use Debt for Growth, Not Survival
Borrowing should strengthen your business, not merely keep it afloat. If you’re borrowing just to pay salaries or utilities, that’s a warning sign that your business model may need adjustment.
3. Track Financial Performance Regularly
Monitor key financial indicators — such as cash flow, profit margins, and repayment schedules — every month. Accounting software or professional bookkeeping can help you see whether your business is moving in the right direction.
4. Keep Communication Open With Lenders
If financial challenges arise, speak with your lenders early. Many banks offer restructuring or refinancing options for businesses that maintain transparency and demonstrate commitment to repayment.
5. Avoid High-Interest Credit Traps
Business credit cards and payday-style loans may offer convenience but often come with exorbitant interest rates. Only use revolving credit if you can pay off the balance monthly.
Read Also: Good Debt vs Bad Debt: How Smart Borrowing Can Grow Your Business and Avoid Financial Traps
Recognizing When Debt Becomes Dangerous
Even the most responsible entrepreneurs can face financial trouble. Warning signs of unhealthy debt include:
- Constantly rolling over one loan into another.
- Using new loans to cover old repayments.
- Missing supplier payments or salary obligations.
- Spending borrowed funds without measurable results.
If you recognize these patterns, your business may already be in financial distress. The good news is that with decisive action, it’s possible to turn things around.
Strategies to Get Out of Bad Debt
Reducing business debt requires both financial discipline and smart strategy. Here are effective steps to regain control:
Take Stock of What You Owe
List all debts — including interest rates, payment terms, and due dates. This helps prioritize which loans to pay off first, usually starting with the most expensive ones.
Boost Sales and Cash Flow
Increasing revenue is one of the fastest ways to regain control. Introduce promotions, enhance customer retention programs, or explore new distribution channels. Every cedi or dollar of additional income can go toward paying down debt.
Refinance or Consolidate Loans
If your credit score is strong, consider combining multiple debts into a single loan with a lower rate. This reduces the number of payments and simplifies cash management.
Cut Unnecessary Costs
Review your expenses and identify nonessential spending. Downsizing your office, renegotiating vendor contracts, or switching to more affordable suppliers can free up cash.
Strengthen Collections
If customers owe you money, implement firmer collection policies. Offer small discounts for early payment or use digital invoicing systems to reduce delays.
Negotiate With Creditors
Contact lenders or suppliers to discuss alternative repayment schedules. Many are willing to extend deadlines or reduce interest rates if they see genuine effort to repay.
Seek Professional Advice
Debt restructuring consultants or financial advisors can negotiate on your behalf and help you design a realistic recovery plan. While their services have a cost, they can often save you much more than they charge.
Stop Borrowing
If your debt has spiraled out of control, stop taking on new obligations until you stabilize. Pause expansion plans and focus entirely on getting your finances back on track.
The Long-Term Benefits of Responsible Borrowing
Handled wisely, debt can be an engine for sustainable business growth. It allows entrepreneurs to seize opportunities, improve operations, and build financial credibility. Lenders view businesses that borrow responsibly — and repay on time — as strong candidates for future funding.
Once you’ve paid off high-interest debts, redirect the money you save each month into a business savings or emergency fund. This safety cushion helps you handle future expenses without relying heavily on credit.
Conclusion
There’s no one-size-fits-all formula for a healthy level of business debt. What matters most is how you manage it. Borrow only with a clear purpose, monitor your financial performance diligently, and act early if trouble arises.
Debt isn’t inherently good or bad — it’s a tool. Used correctly, it can help your business grow stronger. Misused, it can undo years of hard work. The key is finding the balance between ambition and discipline — and never letting your borrowing outpace your strategy.