How to Manage Debt

How to Pay Off Small Business Debt With the Stack Method

Managing finances is tough. Whether it’s in your personal or professional life, it is often one of the most necessary skills that isn’t taught in school, but instead is something learned through trial and error. When you’re talking about business, however, you don’t have time for error. Inept financial management skills can make the difference between success and failure.

So, what can you do when you find your business finances in need of a little attention? At some point, debt may be unavoidable, but how you manage and pay off that debt is extremely important. It’s also something that you can control.

One notable repayment method is the Stack Method. In its simplest terms, this means reviewing all of your outstanding debt by the amount owed and the interest rate. Next, you prioritize your payments, paying down the highest interest debt accounts first while paying the minimum due amounts on the other accounts.

When the first debt is paid off, you take what you were paying on that debt and apply it to the next highest debt. As each debt is paid off, you stack the monthly payments you were making on top of the minimum payments you’ve been making all along, until everything is paid off.

Let’s break down the steps involved in using the Stack Method so that you can implement it within your organization and pay off your debt as quickly as possible.

1. Stop Creating Debt

The first step when trying to get out of debt is to stop creating more debt. This is probably the hardest step as you have more than likely been spending money you don’t have for a while and it will take some time to determine what you can and cannot afford.

For businesses, this doesn’t necessarily mean jettisoning employees or cutting back on services, unless you believe these are truly the issues weighing down your organization’s budget. Before you take any drastic action, you should review your financial statements for the past three to six months. Analyze your profits and losses and all of your expenses and determine if there is anywhere you can cut back a bit. It doesn’t necessarily mean a huge cutback: ordering supplies once a month instead of twice could help to greatly reduce cost.

2. Stack Up Your Outstanding Debt by Interest Rate, From Highest to Lowest

Whether you’re talking about credit card debt or bank loans, the interest rate on each can greatly inhibit your ability to effectively pay down the principle loan amount.

While there is another philosophy that says you should pay down your smallest balance loan first, the math doesn’t add up. When calculated over time, paying down high interest loans first will save you and your organization more money over time. The debt with the highest interest rate that you’ll be focusing on first is called your Target Debt.

3. Investigate the Opportunity to Lower Interest Rates

It’s possible you can get some of your interest rates lowered. For credit card debt this is primarily done by transferring existing balances to credit cards with a lower interest rate. For bank loans, you should call your loan manager and discuss options. If you’ve made regular payments and your business is in good financial standing, an argument can be made to lower your rates.

However, chances are the interest rates for your bank loans are not the highest rates you pay. The point of the Stack Method is to eliminate your debt with the highest interest rates, so focus on lowering those first.

4. Create a Repayment Plan

The first step of this repayment plan is to make a list of all of your minimum monthly payments and make sure they are covered.

Secondly, you need to look at your highest interest balance and determine how much above the minimum payment you can pay each month. This additional amount is sometimes called your Stack Repayment.

When analyzing your finances in Step 1, you should have figured out how much additional money you have per month to allot to paying down debt. Whether its $50 or $500, this Stack Payment amount would be applied to your minimum payment towards the highest interest loan each pay period until that balance is paid off. Even as the minimum payment amount decreases, you should continue to make the same payment to pay it down faster.

Keep in mind that once the first loan is paid off, apply that amount to the debt with the next-highest interest. Once that second debt is paid off, take that compound amount to attack the next debt, and so on.

Using the Stack Method to pay down debt is a logical and more economical way to achieve financial freedom than other methods, including the Snowball Method. It will take discipline and monitoring, but over time, you will start to see the balances on your credit cards declining.

If immediately paying down your debt isn’t an option, there are other ways to address it. Here are five ways to address difficulties paying your business’ debt.

Chapter 6.
INFOGRAPHIC: What’s Debt Financing, and Is It Right for Your Business?0 min