How to manage debt when you’re starting out

Taking on debt is vital for business growth or expansion. The cash advance can provide a startup with the leverage to grow, but how do you decide how much debt is too much?

Having the grand idea is one thing, but actually implementing it and making sure it’s financially viable is another matter entirely.

Australian banks approved $88 billion in new small business loans in 2015, which is $11 billion more than two years ago, according to Australian Bankers Association (ABA) figures.

Almost half of all small businesses have a loan with a bank, with around 25% having access to a credit card, but no other debt, according to ABA figures.

More than one in 10 Australian small business owners re-mortgage their home or go cap in hand to family and friends to borrow funds to get their business idea off the ground, according to research conducted by Optus Small to Medium Business (SMB) in 2016.

Having the grand idea is one thing, but actually implementing it and making sure it’s financially viable is another matter entirely.

Optus SMB’s 2016 survey of 500 small business owners, found that dipping into savings to secure funding is commonplace for small business owners (45%), while 26% have taken out a bank loan and 12% have re-mortgaged their house.

And while taking on debt can be vital for your business to improve its’ cash flow and finance growth or expansion, a lot of consideration needs to go into how much debt your small business should be taking on. This is only something you can answer, based on your goals and capacity to pay back the loan.

Making sure you’re insured appropriately is paramount to helping protect yourself against debt-related risks. A Steadfast insurance broker will be able to review your business and tailor a policy that is right for you.

For example, many overlook the importance of partnership protection insurance, which is one of those policies that requires you to consider things that are not at all pleasant. Having to consider the possibility of illness, permanent disablement or death within the management structure of your business is particularly confronting. However, having a plan in place should something like this happen is all part of being a responsible business owner.

Melbourne startup manages debt

Melbourne entrepreneur Adam Laurie navigated the process of taking on debt when launching his digital startup three years ago.

Laurie launched Digital360, a website optimisation firm that develops data-driven strategies for business growth.

The Melburnian required some working capital, so approached a bank for an initial loan of $200,000. Taking a business plan with solid financial forecasts along to the meeting with the bank manager got the loan application across the line, he says.

“I approached my bank and was able to get the funds I needed to build the business. It was made easier by the fact that I had secured loans for my previous business – a manufacturing venture,” Laurie says.

Digital360 is now debt-free and profitable, which Laurie puts down to sticking to the business plan and staying focused on the end goal. The business now has 25 employees and also has investors on board during a software development phase of growth.

When asked whether having debt hanging over his head was scary, he says: “The stress only comes when the systems are not in place to manage the process of getting out of debt. We’re a data-orientated organisation, so we plan and look for insights every day. We took this same approach to paying off the loan.”

Crunching the numbers

Working out how much debt is right for your business requires an analysis of your cash flows. We all want our business to grow, but you need to be realistic about the potential within your business and the broader industry.

This risk management guide for small to medium businesses produced by Certified Practising Accountants (CPA) Australia can help guide you through some of the questions you should be asking to help you decide just how much debt is appropriate for you. The guide includes a list of questions to help you consider risks posed by financial transactions.

If debts are getting out of control and you’re struggling to make ends meet, it’s important to act quickly, the Australian Securities and Investment Commission (ASIC) advises.

Start by talking to your financial institution or service provider if you’re struggling to keep up with utility bills and let them know you’re experiencing financial hardship. You may be able to pay the bill in instalments.

Many companies have hardship officers who can assess your situation and work out what help is available. Whether they can help you will depend on why you’re having difficulty making payments and how long you think your financial problems will continue.

And be sure to get independent advice or see a financial counsellor before you make any refinancing decisions.

The ABA launched in conjunction with CPA Australia with the support of the Council of Small Business Australia and NSW Business Chamber. It features a step-by-step guide to completing a loan application, including the do's and don’ts, with particular emphasis on preparing a business plan.

So make sure you think very strategically about your debt levels when starting out in business. While debt is all part of the ride, be careful not to get in over your head.

Steps to smarter borrowing:

  • Before you borrow money or consider refinancing, use a budget planner at to see exactly where you spend your money and how much you can afford in repayments.
  • Make sure you allow for interest rate rises and other elements that might affect your future income (such as changing jobs).
  • Take time to compare interest rates, product features and fees and charges and see how these stack up against your existing loan.
  • Shop around online and compare products or use multi-loan calculator at

Source: ASIC

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