You need to decide on debt strategy.
You have three options.
You need a framework.
You need clear guidance.
Debt strategy framework. Refinance. Pay down. Raise more. Your decision.
This guide shows you how.
Strategy framework. Decision making. Clear guidance. Your solution.
Read this. Use framework. Make decision.
Key Takeaways
- Assess your situation first—calculate DSCR and debt-to-equity to understand your current position
- Refinance when rates are lower—use Loan Repayment Calculator to compare current vs. new terms
- Pay down when debt is hurting—reduce debt when DSCR is low or debt-to-equity is too high
- Raise more when debt is helping—add strategic debt when you can service it and it enables growth
- Use calculators to model scenarios—compare different strategies using debt and loan calculators
Table of Contents
Why Framework Matters
Framework enables good decisions.
What happens without framework:
- Decisions are made blindly
- Strategies don’t match situation
- Opportunities are missed
- Problems develop
What happens with framework:
- Decisions are informed
- Strategies match situation
- Opportunities are captured
- Problems are prevented
The reality: Framework enables success.
Assess Situation
Assess your situation first:
Calculate Current Ratios
What to calculate:
- DSCR using our Debt Service Coverage Ratio Calculator
- Debt-to-equity using our Debt-to-Equity Ratio Calculator
- Current payment capacity
- Leverage position
Why it matters: Assessment shows starting point.
Identify Goals
What goals to identify:
- Reduce risk
- Lower costs
- Enable growth
- Improve flexibility
Why it matters: Goals guide strategy.
Assess Market Conditions
What conditions to assess:
- Interest rates
- Credit availability
- Market conditions
- Growth opportunities
Why it matters: Conditions affect options.
Pro tip: Assess situation. Calculate ratios, identify goals, assess conditions. See our debt health assessment guide for detailed evaluation.
Refinance Strategy
When to refinance:
When Refinancing Makes Sense
What situations favor refinancing:
- Interest rates are lower
- Current terms are unfavorable
- Payment capacity is good
- Better terms are available
Why it matters: Refinancing reduces costs.
How to Evaluate Refinancing
What to evaluate:
- Use our Loan Repayment Calculator
- Compare current vs. new terms
- Calculate savings
- Assess fees and costs
Why it matters: Evaluation shows value.
Refinancing Considerations
What to consider:
- Refinancing fees
- Break-even point
- New payment terms
- Impact on cash flow
Why it matters: Considerations ensure good decision.
Pro tip: Evaluate refinancing. Use our Loan Repayment Calculator to compare terms and see savings.
Pay Down Strategy
When to pay down debt:
When Paying Down Makes Sense
What situations favor paying down:
- DSCR is below 1.0
- Debt-to-equity is too high
- Debt is hurting business
- Cash flow allows extra payments
Why it matters: Paying down reduces risk.
How to Plan Pay Down
What to plan:
- Prioritize high-interest debt
- Calculate payment impact
- Maintain cash reserves
- Balance debt reduction with growth
Why it matters: Planning ensures effectiveness.
Pay Down Considerations
What to consider:
- Opportunity cost
- Impact on cash reserves
- Tax implications
- Growth trade-offs
Why it matters: Considerations ensure balance.
Pro tip: Plan pay down. Prioritize high-interest debt, calculate impact, maintain reserves. See our debt spiral prevention guide for warning signs.
Raise More Strategy
When to raise more debt:
When Raising More Makes Sense
What situations favor raising more:
- DSCR is strong (above 1.5)
- Debt-to-equity is reasonable
- Growth opportunities exist
- Debt enables expansion
Why it matters: Raising more enables growth.
How to Evaluate Raising More
What to evaluate:
- Calculate new DSCR
- Assess impact on debt-to-equity
- Model cash flow impact
- Evaluate growth potential
Why it matters: Evaluation shows feasibility.
Raising More Considerations
What to consider:
- Payment capacity
- Growth returns
- Risk increase
- Market conditions
Why it matters: Considerations ensure prudence.
Pro tip: Evaluate raising more. Calculate new ratios, model impact, assess growth potential. Use our DSCR Calculator to see new payment capacity.
Decision Framework
Use decision framework:
Step 1: Assess Current Position
What to assess:
- Calculate DSCR and debt-to-equity
- Determine if debt is helping or hurting
- Identify immediate concerns
- Set priorities
Why it matters: Assessment shows starting point.
Step 2: Identify Options
What options to identify:
- Refinance if rates are lower
- Pay down if debt is hurting
- Raise more if debt is helping
- Do nothing if position is good
Why it matters: Options show possibilities.
Step 3: Model Scenarios
What scenarios to model:
- Use calculators to compare options
- Calculate impact of each strategy
- Assess risks and benefits
- Compare outcomes
Why it matters: Modeling shows best choice.
Step 4: Make Decision
What decision to make:
- Choose strategy that matches situation
- Align with goals
- Balance risk and opportunity
- Take action
Why it matters: Decision enables progress.
Pro tip: Use framework. Assess position, identify options, model scenarios, make decision. See our smart leverage guide for industry benchmarks.
Your Next Steps
Assess situation. Use framework. Make decision.
This Week:
- Review this guide
- Assess current debt position
- Identify your goals
- Evaluate options
This Month:
- Model different scenarios
- Compare strategies
- Make decision
- Implement strategy
Going Forward:
- Monitor debt position regularly
- Adjust strategy as needed
- Track results
- Optimize over time
Need help? Check out our Debt Service Coverage Ratio Calculator for payment capacity, our Debt-to-Equity Ratio Calculator for leverage assessment, our Loan Repayment Calculator for refinancing evaluation, and our debt health assessment guide for comprehensive evaluation.
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FAQs - Frequently Asked Questions About Refinance, Pay Down, or Raise More? A Debt Strategy Framework for Founders
How do I assess my current debt position before choosing a strategy?
Calculate your Debt Service Coverage Ratio (DSCR) and debt-to-equity ratio, then identify your goals and assess current market conditions for interest rates.
Learn More...
DSCR tells you whether your income can cover debt payments—below 1.0 means you're not generating enough to service debt. Debt-to-equity shows your leverage level and whether you're overleveraged relative to your equity.
After calculating these ratios, identify what you're trying to achieve: reduce risk, lower costs, enable growth, or improve flexibility. Then assess market conditions—current interest rates, credit availability, and growth opportunities—because these affect which strategy is most viable.
When does refinancing debt make sense for a founder?
Refinancing makes sense when interest rates have dropped, your current terms are unfavorable, and the savings from better terms exceed refinancing fees and costs.
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Use a Loan Repayment Calculator to compare your current payment schedule against new terms. If refinancing saves significant money monthly and the break-even point (where savings exceed refinancing costs) comes within a reasonable timeframe, it's worth pursuing.
Consider refinancing fees, the break-even point, new payment terms, and the impact on cash flow. Refinancing costs money upfront, so the total savings must outweigh those costs over the remaining loan period.
What signals indicate a founder should prioritize paying down debt?
Pay down debt when your DSCR is below 1.0, debt-to-equity is too high, debt is hurting business operations, or you have cash flow to make extra payments.
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A DSCR below 1.0 means your business income doesn't cover debt payments, which is unsustainable. High debt-to-equity means you're heavily leveraged, increasing risk if revenue dips. In both cases, reducing the debt load is the priority.
Prioritize paying down high-interest debt first for maximum impact. But balance debt reduction against maintaining adequate cash reserves and investing in growth—paying down debt too aggressively can starve the business of operating capital.
Under what conditions should a founder consider taking on more debt?
Take on more debt when your DSCR is strong (above 1.5), debt-to-equity is reasonable, clear growth opportunities exist, and the new debt will directly enable revenue expansion.
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Strategic debt that funds growth—equipment, inventory, market expansion—can be a smart move when your financial ratios show you can handle the additional payments. A DSCR above 1.5 means you have comfortable capacity to service more debt.
Model the impact of new debt on your ratios using a DSCR Calculator. If your DSCR stays above 1.2 with the new debt and the funded growth should generate returns exceeding the cost of borrowing, raising more makes financial sense.
How do I use the four-step decision framework to choose between refinancing, paying down, or raising more?
Step 1: Assess current ratios. Step 2: Identify viable options. Step 3: Model each scenario with calculators. Step 4: Choose the strategy that best matches your situation and goals.
Learn More...
Start by calculating DSCR and debt-to-equity to understand your current position. Then identify which options are available: refinance if rates are lower, pay down if debt is hurting, raise more if debt is helping and growth opportunities exist.
Model each viable option using financial calculators to compare outcomes—projected savings from refinancing, risk reduction from paying down, or growth returns from new debt. Choose the strategy that provides the best balance of risk reduction and opportunity capture for your specific situation.
What are the opportunity costs of paying down debt versus investing in growth?
Every dollar used for extra debt payments is a dollar not invested in marketing, hiring, inventory, or other growth opportunities that might generate higher returns than the interest saved.
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If your debt carries 8% interest but a growth investment could return 20%, paying down debt aggressively might cost you more in missed opportunity than it saves in interest. The key is comparing the guaranteed return of interest savings against the expected return of growth investments.
Maintain cash reserves sufficient for 3-6 months of operations before directing extra cash to debt reduction. Balance is critical—overpaying debt while starving the business of growth capital can slow momentum even if it improves financial ratios.
Sources & Additional Information
This guide provides general information about debt strategy frameworks. Your specific situation may require different considerations.
For DSCR calculation, see our Debt Service Coverage Ratio Calculator.
For debt-to-equity calculation, see our Debt-to-Equity Ratio Calculator.
For loan repayment analysis, see our Loan Repayment Calculator.
Consult with professionals for advice specific to your situation.
