Archive for October, 2010


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.

Now stop reading about the Strategic Debt Payoff and start doing! Let’s create your personal profit strategies for growing profit. Call small business profitability coach Merra Lee Moffitt, CFP®. She can be reached at, 888-920-2030 or by email at

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