Should you pay off debt or build a cash cushion first?

Every entrepreneur wrestles with this question at some point. You have a loan staring at you from one side and a near-empty bank account on the other. The “responsible” part of you says, wipe out the debt. But the practical side knows that without some cash on hand, you’re one slow week away from borrowing again.

So what’s the right move?

Let’s break it down in a way that actually fits how small businesses operate, not how textbooks pretend they do.

Why paying off debt first feels like the smart move

Debt carries emotion. It nags at you. You see the balance and feel like you’re failing if you’re not throwing everything at it. For a lot of owners, paying off debt feels like taking control.

But here’s the trap. If you drain every spare dollar into debt and have no cushion left, the next time payroll is tight or a client pays late, you end up right back in borrowing mode. You clear one loan only to open another. You’re just constantly “starting over.”

Why a cash cushion matters more than you think

Cash is not just comfort. It’s control.

A small reserve buys you time to make better decisions. Instead of reacting to every dip in sales, you can hold steady, negotiate better terms, or take on new clients without panicking about short-term cash flow.

For most small businesses, I recommend starting with one to two months of operating expenses as a cushion. That’s not a magic number, but it’s enough to stop the bleeding when something goes wrong.

Once you’ve built that buffer, the debt strategy gets a lot easier and a lot more effective.

How to balance both

Here’s how we usually walk clients through it at Eastlake CPA:

1. Stabilize first.
   Start by covering your core expenses. Think rent, payroll, software, and supplier payments—the bills that would cripple operations if unpaid.

2. Set a clear target for your cushion.
   Don’t just say “I’ll save a bit.” Pick a real number. For example, $15,000 to cover one month of costs. Put it in a separate account so it’s not mistaken for spending money.

3. Pay minimums on debt while you build the cushion.
   Keep all accounts current but focus on liquidity first. The point is to stay operational, not get debt-free overnight.

4. Once the cushion is solid, redirect the surplus toward debt.
   At this point, you can attack the debt more aggressively without fearing you’ll need to borrow again next month.

5. Revisit quarterly.
   Your “right balance” changes as your business grows. Review both your debt and your reserves regularly.

The psychology behind it

This isn’t just about numbers. It’s about stress.

Owners who operate with no buffer often make short-term decisions: discounting services just to get quick cash, delaying taxes, or juggling vendor payments. Once you have a cash cushion, you think differently. You make choices from a stable place instead of survival mode.

That shift alone can be the difference between staying small and scaling sustainably.

The bottom line

Debt reduction is important, but liquidity is survival. Pay yourself some peace of mind first. Then tackle debt with a plan instead of panic.

That’s how you build lasting financial health, one that can handle both a slow season and an opportunity when it shows up.

If you’re unsure what your “right balance” looks like, that’s exactly the kind of planning we help with at Eastlake CPA. We’ll help you find a structure that keeps your cash steady while moving debt in the right direction.

Because the goal isn’t just to owe less. The goal is to run a business that can breathe.