Tweet

Strategic Debt Payoff – Consider future business flexibility when you choose which ‘debt’ to pay next

Guest post by: Merra Lee Moffitt

Article Overview: Many small business owners have multiple debts to pay thanks to the Great Recession and the debt culture we unwittingly bought into over the last 10 years. Stunned as banks have tightened rules, and frightened by the uncertain economy many have become focused on reducing overall debt. Many business owners have numerous debts such as equipment loans, lines of credit, or personal loans.

Strategic Debt Payoff – Consider future business flexibility when you choose which ‘debt’ to pay next

Many small business owners have multiple debts to pay thanks to the Great Recession and the debt culture we unwittingly bought into over the last 10 years. Stunned as banks have tightened rules, and frightened by the uncertain economy many have become focused on reducing overall debt. Many business owners have numerous debts such as equipment loans, lines of credit, or personal loans. The question is where focus your debt pay down dollars once there are a few more dollars in your cash flow?

The common wisdom is to pay off the debt with the highest interest rate first. That reduces your lifetime out of pocket expense, right? But, consider your next target debt payoff from the one that gives your business the most benefit two to three years from now. It may not be the one with the highest interest rates.

In your small business strategic debt payoff plan, consider the issues of quickly improved cash flow, future re-borrowing capacity, flexibility when borrowing from ‘yourself’, or collateral available for funding expansion of your business. Examples in your strategic debt pay down include:

Paying the smallest debt first. It leaves you with those ‘extra’ monthly dollars to accelerate payoff of the second or third item on your list.

Paying off a credit card. Results in that re-borrowing capacity. This has typically been the debt of choice due to high interest rates.

Paying off a Line of Credit. This also leaves you with re-borrowing capacity, and at usually much lower interest rates than credit cards.

Paying off a personal debt. Perhaps that person will loan again in the future. Also from the continued goodwill perhaps refer you some business. And you will maintain your friendship.

Paying into an emergency fund. Your emergency fund is a kind of debt you owe yourself. As your own banker, you’d give yourself a zero-interest loan. Consider it a loan from the bank of you since you’d need to rebuild that account. It also avoids the use of credit cards. Emergency funds are very liquid and without hassle when you need to ‘borrow’ from yourself in the future.

Paying off an income producing asset. Paying off a rental home or a large equipment loan leaves you with collateral that you can borrow against in the future for business expansion. Perhaps the rates will also be lower the next time.

Paying off student loans. While you may feel good to be finally done, there’s no future borrowing flexibility if you need this money later.

Building a 401(k), Roth, or other retirement plan. A few of the retirement choices may be accessed in a pinch when you know the strict IRS rules governing them. When used according to the rules, ‘borrowing’ from these accounts may appear to have little dollar cost (compared to credit card debt). Used excessively, they have often a bigger hidden cost of robbing tomorrow to pay for yesterday. So use these sparingly and with sincere respect for the debt you owe your future self.

Other types of debts. I can’t cover everything in an article this short. Careful consideration of what debts to focus on paying down and accounts to build up will foster your ability to weather the next Great Recession. Call me and we’ll figure out how best to position your business for the strongest position possible.

Related Articles
  Beware of Charged off Debts!
  FDCPA Laws
  Credit Alliance Group has discovered that Banks and Collectors Have a New Twist on the Old Bait & Switch Tactic
  Know your Rights in the FDCPA
  FDCPA Assures Rights of the Consumer
  Tips to Take Control of Credit Card Debt
  IS IT TIME TO CUT UP YOUR CREDIT CARD?
  How Does Debt Settlement Affect My Credit?
  Part 7: Funding Request
  Debt Collectors should follow the FDCPA Laws
  An outlook on the future of Debt Consolidation Companies
  Reduce Your Debt So You Can Save for Your Future
  How Does Debt Consolidation Affect Credit?
  Debt Relief Facts
  What is Debt Collection Harassment?
  Debt Collectors Look for a Victim all the Time
  Credit Alliance Group understands that every dollar counts in paying off your credit card debt
  Budgeting 101: more FAQ's
  Debt Consolidation and Refinancing – Is it Right for You?
  Dealing with Debt Collectors

Article Tags: debt, debt payoff, paying off, small business owners



Related Forum Posts
interested but... - Nana- That was an interesting article, however, it's been my experience as a financial advisor who works SBA franchise loans of 100K - 3 million (daily) that when anyone finances a business via personal resources rather than a business loan, they cannot obtain a working capital loan later on. Should they need it to keep going, they may find themself in trouble. It's better to build a track recrod with a lender right from the start (for future use). It's always better to be in business debt rather than personal debt Lenders tend to take on the attitude that you didnt need them before, so why should they help you now! They simply won't take on the risk. I dont recommend anyone financing themself.
Don’t get into Debt trap - Don't go into debt unless you're very sure (not a gamble) that in the process of going into debt that you will make up the difference you will have to pay in interest later on! Going into debt can sometime be a good tool for getting something for your business or furthering your education when you don't have any money, but it's also a way for you to take a step back when maybe you don't need the extra money right away.
Re: The Top 50 Get Out of Debt Blogs To Watch In 2009 - [quote="claoudi":3b6lvtrt]What is the difference between an overdraft and debt? My husband has run almost £2000 overdraft and he says its not debt just an overdraft, nothing to worry about. I am worried sick and I still see it as debt! He had just finished paying a massive debt last year which took him over 10 years to pay off. Now he's started a small one without telling me. I made him promise to tell me if he had any problems with money which he failed to do so.[/quote:3b6lvtrt] I would agree with you that having an overdraft is a debt. In actual fact that overdraft money that has been used is money that is owed to the bank. If at any time the bank decides for some reason to call in that debt, your husband could finish up in some trouble if he is unable to repay it immediately. The best thing that he can do is pay that overdraft off as quickly as possible and then use money that he actually has and keep the overdraft strictly for emergencies. MichelleJ
Using your home for collateral is one thing, but... - Putting up your home for collateral is one thing, but utilizing the equity in it to finance a business is a whole other ball game and could be damaging in the long run. Do you know that if you completely finance your business with home equity instead of a busienss loan you will not be able to obtain a working capital loan later down the road? should you run into some financial troubles or wish to expand or remodel with working capital loan, you won't be able to get it if you finaced by personal means. It's always best to build a track record with a lender for future use and it's always better to be in business debt rather than personal debt. I always say: "You wouldn't hire a Plumber to do the Electrical in your home, so why would you finance a business using your home equity? Equity loans are for your home, business loans are for your business. You may however, utilize some of the equity in your home for loan down payment (depending upon your qualifications) and we can help determine whether that would be more helpful or damaging to your loan by pre-qualifying you for free. when using your home for collateral, it doesn't necessarily mean you will lose your home (in the event you cannot pay your loan payments). Lenders are always willing to work with you once you have a loan with them and they have already taken on the risk. they typically only utilize what they lien if nothing else can be resoloved (so it's basically a last resort) to go after what they lien.
Getting something for nothing? - This is a tough one because it's hard to get something for nothing. There are two forms of financing - equity and debt. Equity is when you give up a part of your company / invention / idea in return for money or services. Hopefully the person you are bringing on is someone you can work with because you are now partnered until you sell or close down the company or buy each other out. Debt is when you borrow money so you aren't giving up a piece of your company but you have to pay the money that you are borrowing back. If you have a solid credit history or tangible assets then you can get it from the bank. If you don't have either then you can get private money but the interest rates will be higher (10% or more). Since every month you'll have to make payments you'll have to think about how long it will take you to start bringing money into your business from your invention. Either way you're giving up something in return for the financial help.The only other options I can think of are government grants that you don't have to pay back or befriending people who want to help you because they like you and by doing so they are being rewarded (very hard to find!) Good luck!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

You Have A Website What Now

Purchasing Real Estate using the SBA 504 Loan

Web Design in 30 Minutes - Can this be Right?

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.