Managing Business Debt: Smart Strategies for NZ Businesses

Debt can be a powerful tool for business owners when used strategically. It can fund growth, stabilise cash flow, and provide the flexibility to capitalise on new opportunities. However, without a clear plan and disciplined management, debt can quickly become a burden that strains liquidity and erodes profitability.

For small to medium businesses (SMEs), the challenge is balancing the use of debt to fuel sustainable growth without taking on unnecessary risk. In this article, we outline practical strategies to manage debt effectively, helping your business prosper over the long term.

1. Understand the Role of Debt in Your Business

Debt is not inherently good or bad. The key is understanding why you are borrowing and ensuring that the use of debt aligns with your business goals. Broadly speaking, debt can be classified into two categories:

• Growth debt: used to fund expansion, such as new equipment, new product development, business acquisitions or opening new locations.
• Working capital debt: used to manage day to day cash flow, such as covering seasonal fluctuations, supplier payments, or short term operational expenses.

Debt is best used when it supports assets or initiatives that generate returns greater than the borrowing cost. For example, taking out a loan to purchase machinery that increases production capacity and revenue can be a sound decision. Borrowing to cover ongoing losses, however, can quickly lead to unsustainable debt levels.

2. Know Your Numbers

Managing debt effectively starts with a clear understanding of your financial position. This means regularly tracking and reviewing:

• Debt levels: total outstanding debt, including term loans, lines of credit.
• Interest costs: regularly review borrowing costs.
• Repayment schedules: when payments are due and how they align with cash flow.
• Debt service coverage ratio (DSCR): whether your operating income is sufficient to meet debt obligations.

Regular financial reviews allow you to spot potential pressure points before they become problems. Many SMEs benefit from engaging an accountant or advisory firm to help interpret these numbers and model different scenarios.

3. Match Debt to Purpose and Term

A common mistake SMEs make is mismatching the type of debt to its purpose. Short term debt should be used for short term needs, and long term debt for long term investments. For example:

• Short term facilities such as overdrafts, trade finance, or revolving credit should be used to fund working capital needs and should be repaid through the business’s normal cash cycle.
• Medium to long term loans are better suited for purchasing assets with a long useful life, such as equipment, vehicles, or property. 

Matching the term of the debt to the life of the asset ensures repayments are aligned with the cash flow generated by that asset.

4. Maintain Healthy Cash Flow

Even with well-structured debt, cash flow is the lifeblood of your business. The most common cause of debt distress is not necessarily over borrowing, but cashflow mismanagement.  Practical tips include:

• Forecast cashflow detailed daily and monthly cashflows including all material operating revenue and costs as well as short-term and long-term debt repayments, dividends, and capital expenditure.
• Margin and expense management by regularly review pricing, cost of goods, and overheads to ensure profitability is maintained at expected levels.
• Monitor debtor collection closely to avoid delayed customer payments.
• Monitor inventory levels to ensure the business does not have unnecessary cash tied up in slow moving and obsolete stock.

Strong cash flow management ensures you can meet debt commitments without sacrificing operational needs.

5. Keep Debt Flexible

Where possible, maintain flexibility in your debt structure. Facilities that allow for seasonal adjustments, partial repayments without penalty, or redraw options can be valuable in managing fluctuating business conditions.

Many lenders offer revolving credit facilities or flexible repayment options. These can provide a buffer against short term challenges and reduce the need for expensive last-minute borrowing.

6. Avoid Over Leveraging

While debt can accelerate growth, too much debt can create vulnerability. Over leveraged businesses may find themselves unable to respond to unexpected challenges such as economic downturns, supply chain disruptions, or changes in customer demand. 

Warning signs of over leveraging include:

• Consistently using short term facilities at their limits.
• Difficulty meeting repayments without delaying supplier payments.
• Inability to secure new credit from your bank.

Maintaining a conservative approach to borrowing by ensuring debt levels are well within the business’s repayment capacity supports resilience and long-term sustainability.

7. Communicate with Lenders Proactively

Strong relationships with lenders can make a significant difference in times of need. Open, proactive communication builds trust and can result in greater flexibility when circumstances change.

If you anticipate difficulty meeting repayments or need to restructure debt, contact your lender early. Most lenders are more willing to work with businesses that are transparent and proactive, rather than those that present problems at the last minute.

8. Integrate Debt Strategy into Business Planning

Debt should never be managed in isolation. It must be part of your broader business strategy. Before taking on new debt, consider:

• How it aligns with your growth objectives.
• The impact on cash flow and profitability.
• The return on investment relative to the cost of debt.
• Contingency plans if projected revenues don’t materialise.

An annual review of your debt structure, alongside your strategic and financial plans, ensures alignment and reduces surprises.

9. Seek Professional Guidance

Debt markets and lending terms can be complex, and SMEs often lack the time or resources to evaluate all available options. A debt advisory firm can add value by:

• Assessing your current debt position and capacity.
• Identifying risks and opportunities for improvement.
• Negotiating more favourable terms and conditions with lenders.
• Debt structuring options depending on your current debt capacity and financial position.

Independent advice can help you avoid common pitfalls and ensure your debt is working for your business.

Final Thoughts

Debt, when managed strategically, is a catalyst for growth. It can enable investment in new opportunities, strengthen cash flow, and build a more resilient business. The key for SMEs is to approach debt with a clear plan, align borrowing with business objectives, and regularly review performance against obligations.

Contact the Andersen Corporate Finance team today to ensure your borrowing facilities and structure are optimised to support your business’s long‑term success.

Author - Nick Savill