Understanding Healthy Business Debt: How Much Is Acceptable?
Business debt can be a smart way to fund growth, invest in new opportunities, or handle cash flow gaps—but only when it’s managed wisely. The real challenge? Knowing how much debt is actually healthy for your business. Push past that line, and things can quickly become overwhelming.
If you’re starting to feel that pressure, you’re not alone—and the good news is, there are ways to turn things around. In this article, we’ll break down what “healthy debt” really means, how to spot red flags, and the steps you can take if your business is carrying more debt than it should.
What Is Business Debt?
Debt can be a supercharger for growth—or a heavy anchor if it spins out of control. Business debt is any money your company owes to outside parties—bank loans, business-credit-card balances, vendor invoices and more. Many businesses rely on debt to stock inventory, hire new team members or smooth out cash-flow hiccups—but without a clear plan, that same debt can quickly become overwhelming. In fact, according to the Federal Reserve Banks’ 2024 Report on Employer Firms, 39% of small businesses carried more than $100,000 in debt outstanding at the time of the survey.
As small-business advisor Maria Alvarez puts it, “Having the right capital at the right moment can spark explosive growth. Mismanaged debt? That can stall your momentum just as fast.”
To keep your borrowing healthy, start by understanding the two sides of the coin:
- Consumer Debt: Personal obligations—mortgages, auto loans or your personal credit-card balance.
- Business Debt: Financing taken on for company purposes—equipment loans, merchant cash advances or a branded line of credit.
It can get fuzzy (charging office supplies on your personal card is consumer debt; the same purchase on your company card is business debt), but drawing that line is key. Once you know what you owe—and where—it’s easier to measure what’s manageable and spot when you’re veering into risky territory.
Using Debt To Grow
Debt often gets a bad rap—much of it thanks to sky-high credit-card rates that leave consumers drowning in bills. But in the realm of business, borrowing can be a strategic move when done right. The trick is spotting which debts will help you scale and which ones will sink you.
Good Debt: Your Growth Accelerator
Good debt is money you borrow to fund assets or initiatives that pay you back over time. Think of it as fueling your future success:
- Equipment & Technology: Taking out a loan to upgrade machinery or software that boosts productivity.
- Expansion Costs: Financing a second location or hiring skilled staff to push into new markets.
- R&D & Marketing: Investing in product development or targeted campaigns that promise measurable returns.
When you use debt this way, the income you generate should more than cover your interest payments—letting you grow without draining cash reserves.
Bad Debt: The Quicksand Trap
Bad debt, by contrast, often comes with steep interest rates and little hope of a return. It’s the kind of borrowing that leaves you servicing fees instead of building value. Common culprits include:
- Unsecured Credit Cards: Charging everyday expenses or payroll on a high-APR card.
- Short-Term Cash Advances: Taking merchant advances with fees that can exceed 100% APR.
- Personal Loans for Business Costs: Blurring lines between personal and company finances, often at unfavorable terms.
Racking up this kind of debt can strangle your cash flow and derail long-term plans.
When Does Business Debt Cross the Line?
There isn’t a one-size-fits-all number that spells “too much” debt for every small business. Your ideal borrowing level hinges on factors like your industry norms, profit margins and overall cash flow. A handy way to gauge if you’re in safe territory is the Debt-to-Income Ratio (DTI)—which shows how much of your revenue goes toward servicing debt.
Measuring Your Debt Load: Debt-to-Income Ratio
- Calculate your total monthly debt payments. This includes loan installments, credit-card minimums, lease payments, etc.
- Determine your average monthly income. Use revenue after returns and allowances.
- Compute DTI: divide your total monthly debt payments by your total monthly income.
Example: If you owe $2,000 each month and your business takes in $8,000, your DTI is 0.25 (25%).
What Your DTI Really Means
| DTI Range | Interpretation | What to Do Next |
|---|---|---|
| Less than 20% | Excellent – debt is well under control | Consider smart investments (equipment, marketing) |
| 20% – 39% | Healthy – manageable obligations | Monitor cash flow; maintain or slightly grow debt |
| 40% – 59% | Caution – approaching risk territory | Trim non-essential expenses; explore refinancing |
| 60% or more | High risk – debt may be choking growth | Prioritize debt reduction; seek professional advice |
Smart Steps To Break Free from Business Debt
Getting out of debt is a journey, not a sprint—and the right game plan can make all the difference. Here’s how to tackle your debts in a way that fits your business and keeps you moving forward.
1. Conduct A Comprehensive Debt Assessment
Begin by cataloguing every liability—bank loans, credit-card balances, vendor invoices—and noting each balance, interest rate and payment schedule. A detailed snapshot lets you identify high-cost obligations and develop a targeted action plan.
2. Select The Optimal Repayment Strategy
Two proven methods can accelerate your progress:
| Strategy | Approach | Benefit |
|---|---|---|
| Debt Avalanche | Allocate extra funds to the highest-interest debt, while maintaining minimum payments on the rest. | Minimizes overall interest expense. |
| Debt Snowball | Eliminate your smallest balance first, then apply that freed-up cash to the next smallest debt. | Builds momentum and psychological wins. |
3. Refinance or Consolidate for Efficiency
High interest rates and multiple payment dates can strain cash flow. Refinancing or consolidating into a single, lower-rate facility simplifies your obligations and can reduce your monthly outlay, freeing up capital for operations.
4. Enhance Revenue Streams
Boosting income not only fuels growth but also creates more capacity for debt repayment. Consider tactics such as:
- Tiered Service Packages: Encourage larger purchases with value-added bundles.
- New Market Channels: Partner with online platforms or complementary businesses to expand your reach.
- Cross-Selling & Upselling: Introduce add-on products or premium services to existing customers.
5. Strategic Debt Settlement & Support
If regular repayment plans are stretching your business too thin, debt settlement might offer a smarter path forward. This approach involves negotiating directly with creditors to reduce what you owe—often slashing balances and easing payment terms.
Experienced debt relief advisors can help manage these negotiations, freeing you from the stress of back-and-forths while keeping your focus on running the business. With the right support, settlement can be a practical way to lighten the load and restore your financial footing.
Ready to Take Control of Your Business Debt?
If debt is putting pressure on your business—or you’re at risk of falling behind on payments like a merchant cash advance—know that you’re not alone, and there are solutions available.
CuraDebt has helped thousands of small businesses navigate tough financial situations over the past 24+ years. From reducing balances to negotiating better terms, we focus on strategies that bring real relief—without judgment and with your long-term success in mind.
👉 Click here to get your free consultation and see how we might be able to help your business breathe a little easier.