Map all your business debt by effective cost
Business debt has more variation in structure and cost than personal debt. List every obligation: SBA loans, bank term loans, equipment financing, business lines of credit, business credit cards, merchant cash advances (MCAs), invoice factoring arrangements, and any personal guarantees on business debt.
For each, calculate the effective annual percentage rate (APR). This is straightforward for term loans but tricky for MCAs, which use factor rates instead of interest rates. A $50,000 MCA with a 1.4 factor rate means you repay $70,000 regardless of when you pay it back. If you repay over 12 months, the effective APR is around 80%. Over 6 months, it is over 200%.
MCAs are almost always the highest-cost obligation in a business debt stack and should be the top payoff priority in almost every scenario.
Payoff priority by loan type
Priority 1: Merchant cash advances
Highest effective cost, structured as daily or weekly debits from your business account. Pay these off first — aggressively. Some MCA providers offer early payoff discounts; ask for them. Once the MCA is cleared, redirect those daily debits into a business savings buffer instead.
Priority 2: Business credit cards and high-rate lines
Business credit cards often carry 20 to 28% APR and affect both business and personal credit (for personally-guaranteed cards). Target these using the avalanche method — highest rate first. Keep utilization below 30% on any cards you maintain open.
Priority 3: High-rate online term loans
Online lenders (OnDeck, Kabbage, Bluevine) often charge 30 to 80% effective APR on short-term loans. Check if your loan has prepayment benefits — some reduce the remaining interest owed when you pay early. Pay these well before the term ends.
Priority 4: SBA loans and bank term loans
SBA 7(a) loans at prime + 2.75% (roughly 10–12% currently) are the lowest-cost business debt for most small businesses. Pay the minimum and use extra cash flow for higher-rate debt first. Note: SBA loans often have prepayment penalties in the first 3 years for loans over 15 years — check before making large extra payments.
How to find extra cash flow for payoff
Unlike personal debt, business debt payoff needs to be balanced against keeping the business operational. The goal is to identify revenue above your minimum operating requirements and direct it to debt.
Review your profit and loss statement for the last 3 months. Identify: any subscriptions or recurring costs that are not essential, vendor contracts up for renewal (renegotiate), and receivables collection speed (faster collection = more cash available for debt payoff).
A practical approach: after every revenue month, calculate what exceeded your minimum operating threshold and send 60 to 70% of the excess to debt payoff. Keep 30 to 40% as a cash buffer to protect against slow months without taking on new debt.
Refinancing business debt: when it makes sense
If you have high-rate business debt but now have 12+ months of solid revenue history and improved credit, refinancing can dramatically reduce your cost. Banks and SBA lenders offer much lower rates than online lenders and MCAs. Qualifying for an SBA loan to pay off an MCA can cut your effective rate from 100%+ to 10–12%.
Requirements to refinance into bank or SBA products: typically 2+ years in business, $100K+ annual revenue, 640+ credit score, and no recent defaults. If you are not there yet, aggressively pay down MCAs and high-rate debt to strengthen your profile for refinancing in 6 to 12 months.
Protect personal finances when paying business debt
Many small business loans require personal guarantees, meaning your personal assets — home, savings, personal credit — are at risk if the business cannot pay. Know which loans have personal guarantees and treat them with the same urgency as personal debt.
If business revenue is insufficient to cover debt payments, address it before it becomes a personal crisis: communicate with lenders early (many prefer modified payment plans to default), consider asset sales within the business, or consult a business attorney about restructuring options. Default on a personally guaranteed business loan affects your personal credit score and can lead to personal collection actions.
Track all your debt in one place
Add business and personal loans together in DebtClear to see the full picture, find the optimal payoff sequence, and track progress toward your debt-free date.
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