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Creating a Business Debt Snowball Plan

Creating a Business Debt Snowball Plan

Getting out of business debt can feel overwhelming, but it is possible with some planning and discipline. A debt snowball plan can be an effective way for a business to become debt-free over time. The goal is to pay off debts from smallest to largest, gaining momentum as each balance is paid off.

How It Works

The debt snowball method involves listing out all of your business debts from smallest balance to largest. You then pay minimum payments on all debts except the smallest, putting as much money as possible towards the smallest debt first. Once that smallest debt is paid off, roll that payment amount into the next smallest debt, and so on.

This allows you to gain momentum as debts are paid off one by one. With each debt you pay off, you free up more cash to put towards the next debt, like a snowball rolling downhill gaining size and speed. The psychological wins of paying off debts also helps keep you motivated to stick to the plan.

Getting Started

To start a business debt snowball, first list out all of your business debts and key details including:

  • Creditor name
  • Total balance
  • Minimum monthly payment
  • Interest rate

List the debts from smallest balance to largest. Here is an example debt snowball for a small business:

Creditor Balance Min. Payment Interest Rate
Store Credit Card $1,200 $30 14.99%
Equipment Loan $5,500 $150 9.99%
Business Line of Credit $12,000 $200 7.99%
SBA Loan $50,000 $650 6.99%

Next, evaluate your cash flow and budget to see how much money you can set aside each month above the minimum payments to put towards the debts. The goal is to put as much excess cash as possible each month towards the smallest debt first.

In this example, if an extra $500 per month can be budgeted towards debts, that $500 would be put towards the store credit card first. This is in addition to the $30 minimum payment.

Making Progress

As debts are paid off from smallest to largest, the freed up money from those monthly payments can be rolled into paying off the next debt. In this example:

  1. The store credit card would be paid off first after several months, freeing up the $30 minimum payment.
  2. That $30 would then be added to the $150 minimum payment on the equipment loan, making the new monthly payment $180. The extra $500 per month also continues to be put towards this debt.
  3. Once the equipment loan is paid off, that $180 now freed up would be added to the $200 minimum payment on the business line of credit. The monthly payment on the line of credit is now $380 plus the continuing $500 extra per month.

This snowball effect allows progress to build on itself, maintaining motivation and gaining momentum with each debt paid off. Eventually, even large debts can be defeated through this method.

Tips for Success

Sticking to a debt snowball plan takes discipline, but gets easier with each small win. Here are some tips:

  • Automate payments – Set up automatic payments on all debts to avoid late fees or hits to your credit. Paying manually gives more chance of missing payments.
  • Track progress – Update your debt snowball spreadsheet each month to see the balances going down. Visually seeing the debts shrink helps motivate.
  • Reward milestones – Celebrate each time you pay off a debt, no matter how small. This positive reinforcement helps push you towards the next goal.
  • Re-allocate windfalls – Any financial windfalls like tax refunds or bonuses should go straight towards the debt snowball, accelerating progress.
  • Avoid new debt – Fight the temptation to take on new debt that would throw off the snowball. Stay diligent.

Ask any small business owner who has done it – the feeling of becoming 100% debt free is amazing. The debt snowball method can help you methodically become debt free over time through progress and consistency. Give it a try and take control of your business finances!

Additional Resources

For more help with tackling business debt, here are some useful resources:

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