The first step is to target any high-interest debt, which refers to debt with an interest rate over about 6-8%. This includes credit cards, short-term loans, and variable rate loans. Paying these debts down faster stops excess interest charges from accruing and provides the best “bang for your buck.”
For example, if you have $10,000 available, focus first on credit card balances over 15-25% APR before paying extra on a business term loan with 6% APR. There are Reddit threads and Quora posts that provide more detail on this concept.
Variable rate debt refers to loans with interest rates that fluctuate over time, often based on indexes like the prime rate. Since variable rate debt carries future interest rate risk, paying these balances down with excess funds can be smart. This is especially true if rates are projected to rise steadily in the coming years.
For example, NerdWallet suggests using extra profits to pay down variable business loans when possible before interest rates potentially spike. Reducing variable rate debt provides more certainty on future interest expenses.
Another option is to consolidate multiple high-interest debts into one loan with a lower fixed interest rate. This allows you to streamline monthly payments into one lower payment. Online sites like LendingTree and Fundera allow you to easily compare business loan and line of credit offers.
For medium to long-term business loans that have fixed interest rates below 8%, focus on paying down the principal every month before turning attention to lower cost debts. Set up automatic monthly payments to make sure you chip away at these term loans consistently.
Term loans also tend to have prepayment penalties, so consult with your lender before making lump sum payments. Legal sites like FindLaw outline the rules around prepaying term business loans.
It’s also important to balance debt repayment with building a cash reserve fund equal to 2-6 months of fixed operating expenses. This rainy day fund provides a buffer in case of an emergency or revenue slowdown.
As noted on Reddit, views are mixed on ideal cash reserve levels for small businesses. Holding some cash likely makes sense rather than putting every excess dollar toward debt.
Paying down business debt faster by deploying excess cash has many benefits:
All small business owners likely wish they had lower debt payments and more cash freed up for growth and operations. Carefully directing excess funds toward paying down debt faster is one of the best ways to accomplish this goal over the long-term. Just be sure to prioritize the highest cost debt first while balancing the other considerations covered above.
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