In the early stages of building a company, debt is often the catalyst for success. Whether it’s a high-interest credit card used to buy your first batch of inventory or a merchant cash advance to bridge a slow month, most founders are willing to do whatever it takes to access capital.
However, as your business matures, that same debt can quickly shift from a propellant to an anchor.
Throughout my career as an entrepreneur and an active investor, I’ve observed a consistent and dangerous pattern: Entrepreneurs are experts at taking on debt, but they’re often ill-equipped to manage it once the business stabilizes. The stakes are massive. In the U.S., nearly three-quarters of small businesses carry debt. Although 38% of borrowers owe less than $100,000, the average SBA loan amount has risen to $458,497.
When monthly payments are too heavy or predatory interest rates are squeezing away from your margins, you have three basic options: Refinance, consolidate, or kill. Choosing the right one and pulling it at the right time will make the difference between a business that succeeds and one that merely survives.
When to Refinance: Trading Performance for Better Terms
In refinancing, a debt is replaced with a new one that has more favorable terms. In most cases, this is about one thing: Interest rates.
The signal to refinance.
When your business’s risk profile has outpaced its original profile, you should refinance. When you first took out that loan at 12% interest, you were unproven. In the meantime, you have a clean tax return, a growing EBITDA, and a better credit score. As a result, lenders see you as a “safer” investment.
If any of the following apply to you, you should consider refinancing:
- Market rates have dropped. You might be eligible for a new loan if the Fed lowered rates since you took out your first one.
- Your credit score has jumped. When your credit score increases from 640 to 720, you can save thousands of dollars in interest on loans.
- Your revenue is stable. It’s no secret that banks love predictability. A lower rate can be negotiated if you can demonstrate consistent cash flow for 12–18 months.
The goal.
Our primary objective is to reduce the cost of capital. By reducing the interest rate on a $500,000 loan from 10% to 6%, you will not only save money but also increase your cash flow, which can be reinvested into new hires or R&D.
When to Consolidate: Simplifying the Chaos
When a business grows, it’s easy to end up with a “debt quilt”, a patchwork of small equipment loans, multiple credit cards, and lingering debt. By consolidating those different high-interest payments, you can make one manageable payment each month.
The signal to consolidate.
You might want to consider consolidation if you find that debt management takes up more time than business management.
You may qualify for an SBA 7(a) loan if you’re never able to make payments on time, incur late fees, or cannot keep track of your liabilities across five different portals.
Consolidate when:
- You have multiple high-interest points. It’s a no-brainer to roll several credit cards with 22% APRs into a single term loan at 10% APR.
- You need to fix your Debt-to-Income (DTI) ratio. When investors look at a balance sheet, a single structured loan is more attractive than a dozen revolving lines of credit.
The warning.
You should never consolidate “up” the interest ladder. It’s not uncommon for founders to take out a Merchant Cash Advance to pay off lower-interest credit card debt and simplify their lives. That would be financial suicide. An interest rate that is lower when you consolidate should always result in a lower weighted average.
When to Kill Debt: The “Freedom” Play
According to one school of thought in finance, you should never pay off low-interest debt early because you can earn more by investing that money.
I disagree. Entrepreneurs already face a high level of risk. After all, a business is a risky asset. Your income is also a risky asset. Even “cheap” debt adds a layer of fragility to your life that can cloud your judgment.
The signal to kill debt.
Once you reach the profit plateau, you should aggressively pay down (kill) your debt. At this point, the business is consistently generating excess cash that doesn’t need to be used for growth immediately.
Debt should be killed when:
- The “psychological interest” is high. If you’re anxious about your debt or can’t take calculated risks because of it, you should pay it off. You can’t put a value on mental clarity more than a 2% arbitrage spread can.
- Your ROI on reinvestment is lower than your interest rate. If you are paying 8% on a loan but only getting 5% back from your marketing campaign, you should stop the loan and terminate it.
- You are preparing for an exit. An “immaculate” balance sheet is highly sought after by buyers. An acquisition process can be significantly smoother if debt is eliminated before the valuation.
The “Kill Order” Framework
If you decide to kill your debt, make sure you do it strategically. As a general rule, I use a three-step hierarchy:
- Toxic debt. The interest rate on any loan or credit card with an APR over 15%, such as credit cards and MCAs. These are emergencies. Kill them first.
- Variable debt. Floating interest rate loans. These are “landmines” in a volatile environment. Kill them next.
- Strategic debt. Loans for equipment or real estate with low interest rates. When these are under 5%, pay them as scheduled, but don’t worry about killing them until the first two categories are gone.
Conclusion: Debt is a Tool, Not a Destination
Most successful entrepreneurs treat debt like a power tool: they use it to build something specific, and then they put it away. In addition, it isn’t left running in the background.
When your debt is running your life, it’s time to act. The ultimate luxury in business is total autonomy. Refinance when you’ve proven your worth, consolidate when you’ve lost the script, and kill the debt when you’re ready to kill the debt.
Liquidity is freedom. But being debt-free? It’s the closest thing an entrepreneur can get to “sleep-at-night” insurance.
Related Reading
Managing debt is just one piece of the financial puzzle. Explore these related guides:
- Financial Advisors Don’t Talk About These 9 Things — Wealth-building truths most advisors won’t share.
- How to Balance Student Loan Repayment with Other Financial Goals — Juggling debt payoff with saving and investing.
- Credit Card Limits: Managing Spending to Protect Your Financial Health — Smart credit management strategies.
- Top Financing Options for Large Loans with Extended Terms — Finding the right loan structure for big expenses.
Image Credit: Towfiqu barbhuiya; Pexels
