Navigating Small Business Debt: What Canadian Entrepreneurs Need to Know 


Navigating Small Business Debt: What Canadian Entrepreneurs Need to Know

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By Bromwich+Smith Staff | 1535 words | Reading Time: 7minutes | Date: 2023/10/13

October is Small Business Month in Canada, a time to celebrate the entrepreneurial spirit that drives the nation's economy. Small businesses play a crucial role in Canada, accounting for a significant portion of the country's GDP and providing many job opportunities. However, as with any venture, small businesses often face financial struggles, and there may be conflicting information on what supports small business owners have.  

The Three Common Forms of Debt for Small Businesses 

Small business owners may contend with various types of debt, each with its own purpose and consequences.  

  1. Business Loans: Business loans are a primary source of financing for many small enterprises. These loans can be obtained from many outlets including traditional banks, credit unions, online lenders, or government programs. They are typically used to fund startup costs, expand operations, purchase equipment, or bridge temporary cash flow gaps. Business loans come with varying interest rates and terms, so it's essential to carefully assess the terms and conditions before borrowing. Reading the small print before you sign the loan agreement, to ensure that you understand your responsibilities are essential to supporting your business.  

  2. Business Credit Cards: Business credit cards offer a flexible way to manage expenses and make purchases specifically for your business. They are often used for day-to-day operating costs, including office supplies, travel expenses, and client entertainment. However, it's crucial to use them responsibly to avoid accumulating high-interest debt. Separating your personal expenses from your business may be difficult at first but will help you down the line when it comes to taxes, and budgeting.  

  3. Line of Credit: A line of credit provides small businesses with a revolving credit limit they can tap into when needed. It's a flexible form of financing used to cover unexpected expenses and to manage cash flow. Interest is only charged on the amount borrowed, making it a cost-effective option when used cautiously. 

How Much Debt is Typical for Small Businesses? 

The amount of debt a small business carries can vary widely based on where you are located, your industry, business size, and financial goals. While there is no one-size-fits-all answer, small businesses typically aim to maintain a debt-to-equity ratio that reflects financial stability. A common point of reference is a debt-to-equity ratio of 2:1, meaning for every dollar of equity, there are two dollars of debt.  

  • Cash Flow: Ensure that your business generates enough cash flow to comfortably meet debt obligations. A positive cash flow can support higher debt levels. 

  • Risk Tolerance: Assess your comfort level with debt and your ability to manage it effectively. Some entrepreneurs are more risk-averse and prefer to limit debt, while others are comfortable taking on risk. Again, there is no right answer, it depends on your ability to handle the potential consequences of either choice.  

  • Business Lifecycle: The stage of your business's lifecycle also influences the amount of debt you may need. Startups may require initial investments, while established businesses may leverage debt for growth or expansion. 

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What is Acceptable to Go Into Debt For? 

Debt can be a strategic tool when used wisely. Small business owners should consider taking on debt for the following purposes: 

  1. Business Expansion: If your business has a growth opportunity that requires additional funds, taking on debt to fund expansion can be a smart move. This could include opening a new location, entering a new market, or launching a new product line. Understanding your market and the potential for income growth will take some research and time but could be beneficial in the long run.  

  2. Investment in Assets: Borrowing to purchase essential assets like machinery, technology, or vehicles can improve productivity and competitiveness, ultimately contributing to higher revenue and profitability. You may consider investing in your staff, higher wages may be enticing to keep staff engaged and reduce turnover, and rehiring/ retraining costs.  

  3. Cash Flow Management: Short-term loans or lines of credit can be used to manage cash flow gaps caused by seasonality or unexpected expenses. This helps maintain business operations without disruption. 

Warning Signs of Financial Trouble and Next Steps 

Small business owners must also be on the look out for warning signs that their business may be facing financial difficulties. Here are some red flags to watch out for: 

  1. Consistently Declining Revenue: A persistent drop in revenue could indicate market challenges or issues with your business model. It's essential to be aware, and be willing to adjust as the market changes. Research what your competition is doing, and invest in ways to do it better.  

  2. Cash Flow Problems: Difficulty meeting regular expenses, including payroll and bills, is a severe concern.  

  3. Increasing Debt Load: If your debt levels are continuously rising, it could be a sign of over-leverage. This may lead to challenges in servicing existing debt and securing new financing- depending on how your business is set up this could also affect your personal ability to secure credit.  

  4. Decreasing Profit Margins: Shrinking profit margins can erode your ability to cover expenses and debt payments. It's crucial to stay on top of market costs and be strategic with your pricing strategy. 

  5. Customer Attrition: A significant loss of customers or a decline in customer satisfaction may signal a problem with your products, services, or customer engagement. Consider customer surveys, once you understand where the problem is you are able to make steps to fixing it before your business is no longer sustainable.  

If you notice any of these warning signs, it's essential to take action promptly. Potential next steps include: 

  • Financial Assessment: Review your financial statements to understand the root causes of the problems. 

  • Cost Reduction: Identify areas where you can reduce costs while upholding your business standards.  

  • Debt Restructuring: Contact lenders to discuss possible debt restructuring options, such as extending loan terms or reducing interest rates. 

  • Business Pivot: Explore opportunities to pivot your business model or product/service offerings to adapt to changing market conditions. 

  • Seek Professional Help: Consult with financial advisors, accountants, Debt Relief Specialists or business consultants for expert guidance on how to address your financial setbacks and goals. 

Debt doesn’t always need to be scary, for a small business debt can be a useful tool for when managed wisely and used for strategic purposes. However, it's crucial to be aware of your debt levels, only take on debt for the right reasons, and monitor your business's financial health regularly. Small Business Month in Canada is not just a time for celebration but also an opportunity to reflect on the financial well-being of your business and take steps to ensure its prosperity. 

If you are struggling with your personal finances and debt levels due to added debt within your small business, Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, or request a call back at contact us page.   

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1: What are the common forms of debt small businesses in Canada might face? 
Business loans, business credit cards, and lines of credit are common forms of debt for small businesses in Canada. 
2: How much debt is considered typical for small businesses, and what factors influence it? 
The amount varies based on location, industry, business size, and financial goals. Factors include maintaining a debt-to-equity ratio, positive cash flow, risk tolerance, and business lifecycle stage. 
3: What is acceptable for small businesses to go into debt for? 
Small businesses can strategically use debt for purposes such as business expansion, investment in assets like machinery or technology, and short-term cash flow management. 
4: What are warning signs of financial trouble for small businesses, and what steps should be taken? 
Warning signs include declining revenue, cash flow problems, increasing debt load, decreasing profit margins, and customer attrition. Steps include financial assessment, cost reduction, debt restructuring, business pivot, and seeking professional help. 
5: How can small business owners manage debt wisely and address financial setbacks? 
Small business owners should monitor debt levels, use debt for strategic purposes, and regularly review financial health. In case of financial setbacks, actions may include a financial assessment, cost reduction, debt restructuring, business pivot, and seeking guidance from financial advisors or Debt Relief Specialists
6: Can you provide examples of strategic reasons for a small business to take on debt? 
Examples include funding business expansion, investing in essential assets like machinery, technology, or vehicles, and using short-term loans or lines of credit for effective cash flow management. 
7: What should small business owners do if they identify warning signs of financial trouble? 
Take prompt action, including a thorough financial assessment, identifying areas for cost reduction while maintaining standards, exploring debt restructuring options with lenders, considering a business pivot, and seeking professional guidance from financial advisors or Debt Relief Specialists
8: Is there a recommended debt-to-equity ratio for small businesses in Canada? 
While there's no one-size-fits-all answer, a common point of reference is a debt-to-equity ratio of 2:1. However, the ideal ratio can vary based on factors like industry, risk tolerance, and business goals. 
9: How can small businesses ensure they use credit cards responsibly to avoid high-interest debt? 
Use business credit cards for specific business expenses, separate personal and business expenses, and ensure responsible usage to prevent the accumulation of high-interest debt. This practice aids in tax management and budgeting. 
10: In what situations should small business owners consider seeking professional help with their finances and debt? 
Small business owners should consider seeking professional help, such as financial advisors, accountants, or Debt Relief Specialists, when facing financial setbacks, challenges in debt management, or the need for expert guidance on business goals and strategies. 


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