I’ve casually dropped the amount of Fernseed’s debt—$350,000—in past posts, in part because I want to normalize having debt as a small business. It may seem like a big number compared to the average consumer debt (which is around $23,000 not including mortgages), but it’s not that much for a business.

Businesses typically carry about 5 and 10 times the average consumer debt ($100-250k), but of course that number varies based on how much revenue a business generates.

If we think of money like the arm of a pendulum, and debt as the “swing distance,” or amplitude, then the longer the arm, the greater the swing distance. Or, the more money available, the greater the capacity to accumulate debt. Businesses usually generate more revenue than individuals, so they can, unfortunately, accumulate more debt.

It’s the interest, stupid

Of course just as businesses can accumulate debt, they may also have the ability to quickly pay it down. This might explain the perpetual hope business owners have around finally getting control of mounting debt. It’s always possible for sales to bounce back to where they were before the debt started to accumulate, right?

Consider that in January of this year, Fernseed made a $4,300 profit. If you apply that amount consistently toward $355k in debt, it would take about 7 years to pay off. Double that profit—a reasonable scenario at this point in our business—and you cut that time in half.

Of course that math is assuming you’re not paying any interest. Now let’s imagine $355,000 in debt again with a 16.99% interest rate, which is typical—even low—for a business credit card. If you make payments anywhere under $5,000 per month, it will never be possible for you to pay off the debt with accumulating interest. Starting at $5,100 per month, it would take you 25 years, with total interest payments of $1.18 million.

That is what insurmountable debt feels like. Even at our current profit, with an average interest rate credit card, we could never hope to pay off our debt. You have to consolidate debt that high at a lower interest rate to pay it off. There is no other way.

Now of course most businesses aren’t carrying $355k in debt. So is this really a problem?

Yes! Let me give you an example at much lower stakes.

How fast debt can happen, how hard it is to get rid of

Let’s say a family restaurant in Ferndale, Michigan usually pulls in $40,000 per month with $35,000 in expenses, so they’re generating $5,000 in monthly profit. Not bad! Now imagine their revenue dips to $32,000 per month because of road construction diverting traffic away from their business. This type of revenue dip isn’t covered by insurance, and most of their expenses are fixed, so with an $8,000 drop in monthly revenue, the business will take a $3,000 monthly loss.

Imagine now that the construction lasts longer than planned, so over the next 8 months, the restaurant accumulates $2,500 per month in expenses they can’t cover with profit (because they don’t have any) on a credit card. That adds up to $20,000 in additional short-term liability.

How will this business pay off $20,000 once it returns to profitability?

• With no interest, if the business bounces immediately back to $5,000 in profit per month, it would take 4 months to pay off.

• If the business slowly recovered, generating $1,000 in profit per month and all of it were applied toward the $20,000 in debt, and they had a line of credit with a 7% interest rate, it would take 22 months to repay and they would pay $1,328.78 in interest.

• If the business slowly recovered, generating $1,000 in profit per month and all of it were applied toward the $20,000 in debt, but it was all on a credit card with a 14.99% interest rate, it would take 24 months and they would pay $3,156.39 in interest.

• If the business only generated $500 in profit per month and the credit card had an 18.99% interest rate, it would take 5 years to repay, and they would pay $11,921.68 in interest.

Do you see the problem here?

Businesses with already slim margins and high fixed costs (which is most businesses) have little protection from setbacks that require a temporary accumulation of debt, when revenue can no longer cover expenses. We often have no way of predicting how long the setback will last, so creating a repayment plan is tricky.

This is why small businesses need access to capital at much lower interest rates, but it’s virtually impossible to secure low-interest loans for debt consolidation. This is why they tell you to apply for a line of credit before you need one, although most businesses owners I talk to don’t.

This rapid accumulation of interest, without the profit to service it, was how I found myself in a small business debt spiral that ballooned from $62,000 to $139,000 to $275,000 and eventually $355,000 from 2020 to today.

In the remainder of this post, I am going to walk you through how Fernseed got there. I’ll take you step by step through our revenue, debt, interest expenses, and profit each year starting with our first year in business in 2019 through the end of 2024. I will explain where I got the initial money to start the business, then why the debt accumulated year by year, and the steps I took to manage it once I realized it could not be paid down with business revenue alone.

This will be the first Storefront Revolt post that is only available to paid subscribers because it contains detailed information about Fernseed’s finances.

If you’d like to get access to this and future posts containing my real financials, upgrade to paid—it’s just $8 per month!