As a small business owner, every penny counts. Here’s how to pay off debt fast so you can keep more money that you make. These essential debt payment tips will give you some ideas to get the process started today!
It seems like in order to succeed as a small business you have to go into debt. You have to spend money to make money, right? Unfortunately, this debt will catch up to you eventually and it will bring all your hard work down with it. I always recommend business owners try to have as little debt as possible.
How To Pay Off Debt Fast – Steps to Take
Debt can really harm small business owners. At first, it seems wonderful. You have extra money you can use to invest in your company. Maybe you really needed the money to buy some equipment or advertise your business. No matter the reason, your primary focus should be paying off this debt as quickly as you can.
When you have high-interest loan payments, you end up keeping a lot less of your hard-earned money. Plus, going into debt can cost you a lot in emotional health too. Your business becomes less of a passion and more of working for someone else like your lender!
Don’t worry. I’ll show you how to keep more of your money and pay off your debts in no time at all. Yes, it will take work, but you can do it—and you’ll feel so good once you do.
1. Choose Which Debt to Pay Off First
The first thing you should look at when you are trying to pay off debt is the APR (annual percentage rate) of your loans or cards. One client of mine didn’t know one of her vendor credit cards had an APR of 49%. That’s insanely high.
What is APR?
APR is a percent that is calculated by adding the loan fees with the interest of the loan. Credit Karma explains the entire formula in detail.
You could make a decision about loans based solely on their interest fees, but then you will overlook all of the hidden fees. The APR gives you a better picture since it includes all the fees in the formula.
Try to stay at or below the national average for APRs, which is 15%. My client’s loan APR of 49% was atrocious, avoid anything with this amount.
2. Pay Off Bad Loans Fast
Next, it’s a good idea to look really close at the terms of all of your loans and pay off the ones that are taking the most money from you.
One person I worked with had a Square loan that had terrible terms. It took 10% of her daily sales. She never realized how much that was because the money never hit her account. They just took that right off the top. She thought she was only paying the minimum required payment of $250 per month. During a high sales month, however, she discovered that Square took almost $900 from her sales!
Look at the terms of your loans. If you agreed to a loan with awful terms, prioritize them and pay them off first.
3. Put a Debt Snowball Plan Into Place
Another way to figure out which loans to pay off first is to set up a debt snowball plan. I’ll explain this in even more detail further below.
A debt snowball is a calculated way to become debt-free. You start off paying the smallest loan or credit card off first. Then, slowly work to pay off all of them, one at a time.
Having a debt snowball action plan gives you a better focus. It helps you see where your money is going and how to use it to pay off each debt. Plans give you clarity and confidence and this is one of the best ways to pay off debt.
Read more about the debt snowball below.
4. Earn More Money
When you figure out which debts to pay off, the tricky part is finding the money to use for it. The best way to pay off debt is to earn more money and put that extra income toward your debt payment.
How do you earn more money?
Think beyond mere sales. What are some creative ways you can expand your services?
Here are a few proven ways to make more money as an entrepreneur:
- Teach an online class
- Upsell additional things to your current products
- Write and sell an ebook
5. Decrease Costs
You’ll find even more money to pay off debt when you decrease your business’s costs. This is a practice I recommend everyone do at least once a quarter, even if they aren’t trying to pay down debts.
Go through every single expense and try to find ways to save money on it. Could you find a cheaper internet plan? Are you missing out on insurance discounts? How much are you paying for dining out?
When you go through your budget and critique it, you are in control of your money, it doesn’t control you.
Keep track of all the money you are saving. Put every penny towards debt payment. When those debts are paid off, you will have a huge increase in your expendable income.
How to Create a Debt Snowball
The best way to pay off your debt is by establishing and using a debt snowball action plan. This phrase was made popular by Dave Ramsey. If this is your first time hearing about it, or if you don’t exactly know how to do it, I’ll share the exact steps below.
It’s pretty simple. Think of a snowball. It starts out small. Then the small snowball picks up more snow and grows larger and larger as it rolls down the hill. That’s essentially what you will be doing with your money. Pay off the smaller loans and then use that money to pay off the bigger ones.
1. Pay Off Lowest Debt First
The very first step is to make a list of all of your debts and put it in order of the smallest amount owed to the largest. You’ll pay off the smallest debt first.
It’s really very simple. You’ll pay off each loan, one at a time, from smallest to largest.
2. Use the Payments From This Debt To Pay The Next One
After you pay off the first loan, use the amount you were paying for it and apply it directly to the next loan.
For example, if you were paying $100 a month on your first loan and you pay it off, then take that $100 and apply it to the next loan in line.
3. Repeat These Steps For All Your Debts
When you pay off the 2nd loan, use the total amount you spent on that loan and apply it to the third loan.
The idea is that over time you should be able to pay off your larger debts by paying off the lesser ones first. Imagine having an extra $400 to pay towards that large credit card debt. It’s possible to find that money by making a goal to pay off debt on credit cards and business loans.
Master the Money Masterclass
The topic of debt can be a difficult one. However, I’m passionate about helping business owners get out of debt and start to operate in the black! If you need a little more help along the way, I invite you to join my Master the Money class.
In my class, we’ll tackle all sorts of seemingly complicated money issues such as how to get a consistent paycheck, the right way to set aside tax payments, and—of course—how to pay off your debt.
Pay Off Debt: Final Thoughts
The biggest money-sink in small businesses is loans and credit card debt. It might seem alluring at first to take out that loan so you can finally have money with which to buy essential equipment or tools. Be careful. The fees and interest on the debt will do more harm than good.
If you find yourself with lots of business debt the important thing is to make a plan and pay it off. Your entire goal should be to pay off debt. If you do this, you’ll finally have more income and fewer expenses. This is the secret to a successful small business.
