Creating a Business Debt Snowball Plan
Getting out of business debt can feel overwhelming, but creating a debt snowball plan can help you methodically pay off your debts from smallest to largest. This strategy makes repayment feel more manageable by allowing you to pay off several small debts quickly to build momentum.
Assess Your Debts
The first step is to list out all your business debts by amount owed, interest rate and minimum payment. This includes loans, credit cards, lines of credit, equipment financing, payroll taxes owed, and anything else you owe money on.
-Rank your debts from smallest balance to largest. Don’t worry about interest rates or minimum payments yet – this list is just about the dollar amount owed.
Here’s an example business debt list:
- Credit card 1: $1,200 balance
- Credit card 2: $3,500 balance
- Term loan: $5,000 balance
- Line of credit: $12,000 balance
- SBA loan: $50,000 balance
Choose Your First Debt
Now look at your list and choose the smallest debt to start paying off first using the debt snowball method. This will be “Debt 1” that you relentlessly focus on until it’s fully paid off.
In our example, Credit Card 1 with a $1,200 balance would be the first target.
-Pay as much as possible towards this smallest debt each month while still making minimum payments on all other debts. Every extra dollar you can put towards Debt 1 helps pay it off faster.
Pay Minimums on Other Debts
As you focus intensely on Debt 1, you still need to keep up with minimum payments on all other debts to stay current.
For example, if Credit Card 2 has a $60 minimum payment, the Line of Credit minimum is $200, and the Term Loan minimum is $150, you would pay those minimum amounts each month while pouring any extra money towards Credit Card 1.This protects your credit score and accounts from becoming delinquent while you work on eliminating your smallest debt first.
Roll Over Payments to the Next Debt
Once you fully pay off your first small debt (Credit Card 1 at $1,200), take the monthly amount you were putting towards that debt and add it to the minimum payment on the next smallest debt on your list.
So if you were paying $300 a month towards Credit Card 1, you’d take that $300 and start paying it towards Credit Card 2, which is the next smallest debt you owe.
-This “rolls over” what you were paying on the first debt and applies it to the next one once the first is paid off. This helps you gain momentum in repaying debts by clearing the smallest balances quickly.
Repeat Until All Debts Are Repaid
Follow this method of rolling over debt payments from the smallest debts to the larger ones, paying minimums on everything else to stay current, until everything you owe is fully repaid.
As you eliminate each small debt, it frees up more cash flow to accelerate repayment of the next debt, and so on.
-This “snowball effect” helps you steadily pay off debts from smallest to largest, gaining momentum and small “wins” to stay motivated.
Tips for Making Your Debt Snowball Work
- Use a debt tracker – Apps like Debt Payoff Planner, Debt Snowball Calculator, and Debt Manager can help you stay organized and motivated with custom repayment plans.
- Cut expenses – Free up as much cash flow as possible for extra debt payments by reducing business and personal expenses. Every dollar counts when you’re in repayment mode.
- Find side income – Adding side hustles like consulting, freelancing and selling products/services generates more income you can use to speed up debt repayment.
- Sell assets – Liquidating assets like equipment you aren’t using is a fast way to pay down debt.
- Consolidate debt – You may be able to qualify for a consolidation loan with a lower interest rate, reducing monthly payments on credit cards and loans so more goes towards principal repayment.
- Refinance debt – Similarly, refinancing high-interest debt to a lower rate saves money to accelerate repayment progress.
- Reward progress – Celebrate each small debt payoff milestone to stay excited about the snowball method.
When to Use Business Credit Cards Again
Avoid racking up more credit card debt as you work your snowball plan. Use debit, cash or business credit cards sparingly until all outstanding card balances are paid.
However, responsibly using a 0% intro APR business credit card for a large purchase can make sense during debt repayment. Just be sure you can pay off the balance before rates rise.
Ongoing business credit card use works only if you pay statement balances in full each month. Carrying balances makes cards too expensive and negates snowball progress.
Overcoming Cash Flow Shortfalls
If cash flow can’t cover minimum payments, communicate urgently with creditors to request hardship programs or changes allowing you to make partial payments.
Temporarily pausing 401k/retirement account contributions may help bridge cash flow gaps without penalty. Other options include business credit lines, loans from friends/family, home equity loans, and business cash advances.
These should be last resort options to avoid spiraling back into unmanageable debt.
When to Work With Professionals
If you’ve made your best effort but still face severe cash flow shortages, it may be time to work with financial restructuring professionals.
Options like small business credit counseling provide customized debt repayment plans and strategies. Non-profit organizations offer free or low cost assistance.
For extreme situations, legal and accounting professionals can help formally reorganize or restructure unsustainable business debt through:
- Debt consolidation and negotiation
- Debt refinancing
- Payment plans and settlements
- Bankruptcy protection and reorganization
The Small Business Administration also has local counselors to help advise on business debt problems. Don’t be afraid to ask for help when you need it.
Staying on Track Long-Term
Once you’ve paid off all outstanding business debt using the debt snowball system, staying debt-free for good requires changing habits.
- Stick to a realistic budget that aligns business revenue and expenses.
- Maintain an emergency savings fund covering 3-6 months of fixed costs.
- Only use business credit cards if paying in full each month.
- Save and pay cash for large purchases rather than financing.
- Run lean, keeping fixed overhead low.
- Grow profits over time, plowing earnings back into reserves.
Following these best practices makes managing through future slow periods much less stressful. The key is increasing cash flow and profits rather than debt when funding business growth.
Recapping the Business Debt Snowball Method
The debt snowball technique helps you methodically repay business debts from smallest to largest by:
- Listing all debts from smallest balance to largest
- Paying as much as possible on the smallest debt while making minimums on all others
- Rolling over payments to the next smallest debt once the first is paid off
- Repeating this process as you “snowball” forward until everything is paid
This builds momentum, frees up cash flow faster, and gives you small wins along the way to stay motivated. Pair this with budget cuts, extra income and consolidation to speed up your snowball.
What business debt repayment tactics have worked for you? Share your tips and experience over on r/smallbusiness! Getting out of debt takes time and dedication, but many entrepreneurs have pulled through using a debt snowball plan. You’ve got this!