One of the top priorities for business owners should be paying down debt quickly and efficiently. Eliminating debt will cut your expenses, increase your profits, and allow you to reinvest in your business to generate higher future sales. It also frees up credit you may need later for future investments.
In order to crush your debt quickly, you need to have a plan to make sure you aren’t just paying your bills, but you’re eliminating debt in the most effective way possible.
1. Make a Plan
Make a plan for how you can attack your business debt. To pay down debt faster, prioritize debts that have the highest interest rates first so that you pay less in the long run.
Determine which debts will be paid first and how much you want to pay extra every month.
Does it make more financial sense to pay off your smallest bills so you can make bigger payments on your larger debts, or does the interest on your larger debts outweigh the benefits of paying the smaller loans and debts off early? Should you attack multiple debts at once or focus on one at a time? Once the first debt is paid off, will you focus on a new one or divide that payment across multiple debts?
The answers to these questions will depend on your individual situation, but should be considered in your plan. In order to make the best plan for paying off your business debt, you’ll need to run some numbers to see what your highest priorities are.
Whatever will cost you more in long-term payments is typically what you should focus on first. Your calculations should also take what you can afford to pay into consideration. Maybe you can’t afford to make a whole second payment on a loan each month, but by adding what you can afford to each payment, you can work your debt off faster. Try to figure out what is the most effective use of these smaller payments.
Don’t forget to look at whether debts have additional penalties for being paid off early, and factor that into your decision.
2. Cut Expenses
The easiest way to improve your financial situation and be able to afford more debt payments is to limit your business spending.
This can be done by freezing your spending for optional items, such as equipment upgrades, or by reducing your cost of doing business, such as operational supplies. Do be aware that you should only cut on costs that won’t have a large impact on your customers’ satisfaction or your business’s productivity.
For example, choosing not to a carry a product you don’t sell well may not impact many customers, but cutting payroll may impact many employees, as well as hurt the productivity of your business.
You can also try creative solutions. One trick many businesses use to save money is to implement paperless policies, reducing the cost of paper and ink, as well as helping the environment. This or other strategies may work for your business. Do some research on how other business owners in your industry are able to cut costs for some ideas.
3. Start Paying Down Debt
When you’ve cut your expenses, creating extra cash in your business, it’s time to start paying down that debt.
You may find that your current payment strategy isn’t working as well as you hoped, so don’t be afraid to change it to make payments more effective.
It may feel like you aren’t making progress initially when you’re paying out more of your profits to cover debts, but as accounts are paid off, your business will feel significantly more profitable, and you can begin focusing on the next steps to help your business continue growing.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.