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July 19, 2017
Finance  |  5 min read

How to Pay Off Small Business Debt

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James A. Martin

Things happen, markets change, business ebbs and flows. The uncertainties can make it difficult for a small business to be debt-free.

In fact, 36 percent of U.S. small business owners who’ve borrowed funds are "very or somewhat" uncomfortable with their debt load, according to a Gallup poll. The poll also found that 49 percent of those small business owners say it’s "extremely difficult" to pay down their current debt.

Extremely difficult? Yep. Impossible? Not at all. Here’s a quick overview of the different types of credit small businesses can get, followed by tips for getting out of debt.

4 common types of small business credit

SBA loans and grants from the U.S. Small Business Administration (SBA) provide various government-based loan types that include general loans, disaster loans, microloans, and real estate and equipment loans. The Annual Percentage Rate (APR) is often among the lowest available. For example, a general small business loan, called 7(a), has an APR between 6.5 percent and 8.5 percent as of June 2017, NerdWallet reports. But SBA loans can be difficult to obtain.

Small business term loans are repaid, with interest, over a specified time period. Approvals can be fast and may not require collateral. But you could face a relatively short repayment term (say, 36 months or less). As is often the case, your APR can vary, depending on the lender, the amount borrowed, and so on.

Small business lines of credit differ from loans. With a line of credit, you’re approved for a specific dollar amount, which you draw from as needed. A loan, by comparison, is for a lump sum up front. Another advantage to a line of credit is that you only pay interest on what you’ve borrowed. The APR can fluctuate, however, while a loan’s APR is usually set, and rates may be higher than a term loan’s rate. Also, you may pay a small fee, such as 1 percent to 3 percent, whenever you borrow from the line.

Small business credit cards are a popular way to buy now, pay later. As with consumer credit cards, small business credit cards are available from a variety of financial institutions. Some cards offer cash-back rewards, others give you travel perks, and so on. It helps to shop around and compare cards at NerdWallet, Money Crashers, and The Simple Dollar.

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5 tips for reducing your small business debt

Start with the big picture. Are you getting the best possible return on investment (ROI) from your operations and sales? Are you (or employees) spending too much time on minor activities that don’t lead to revenue? Try to wring as much inefficiency out of your operations as possible, so you and employees can focus more on tasks that will help increase capital flow. True, this won’t get you out of debt per se, but it will help your business be more profitable.

Refresh (or start) your small business budget. Where’s the money going? What can be cut with minimal or no impact to your operations? What’s essential and what’s "nice to have"? By finding expenses to cut, you can put more income toward debt reduction.

Delay big expenses wherever possible. Do you really need new tablets for your mobile workers? Whenever possible, push big-ticket purchases out at least a few months. Use that money instead toward paying down debt.

Follow the "stack" or "snowball" method. There are two main debt payoff strategies: the stack and snowball methods. With the stack method, you identify the loan, line of credit, or credit card with the highest APR. Focus on paying that off first, with the biggest monthly payments you can afford. Pay only the minimum amount on the others. Once you pay off the biggest APR credit, focus on the next biggest, and so on. The advantage: You’ll save interest charges over time.

With the snowball approach, you focus on paying off the debt with the lowest balance, regardless of the APR. Once that’s paid off, focus on the next one. While the snowball method costs more in interest charges, you get the satisfaction of paying off a debt more quickly.

Consolidate. If possible, consolidate loans, credit cards, and other debts into one monthly payment. You may be able to pay less interest over time, too. Talk to a debt consolidation company to find out your options. Intuit offers tips on small business debt consolidation, as does NerdWallet, and National Debt Relief

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