There’s nothing more satisfying than paying off business loans, but how do you know you are paying off the right loans? Paying off business loans takes a strategic approach. When you are trying to decide which business loans to pay off first, here are a few things you should consider:
Understanding the Two Types of Loans: Good & Bad
Good loans are loans that have low interest rates and are investments into the business, developments and/or are assets (ie. office building, expansion/addition, land, etc.).
Bad loans are loans with high interest rates and have open ended balances (ie. credit cards, personal loans, car/truck loans, etc.).
While good loans need to be paid off in a timely manner and should always have their minimum balances paid monthly, paying these off are not as important as paying off the bad loans.
Example: Linnemann Lawn Care & Landscaping, Inc. uses a credit card to earn points for the rewards. We’ve put up to $400k a year on a credit card and have earned $10k in cash back reward checks, as well as free gift cards and frequent flyer miles. However, we make sure we pay off the card balance every month in order to avoid interest, which would only lead to an extra expense on the business.
Three Strategies for Paying Off Loans
When paying off loans there are three strategic approaches you can take:
- Pay loans off based on loan balance size
- Pay loans off based on interest rates
- Pay off loans that will increase your beacon score
Paying loans off based on balance size is a great option if you like the snowball affect and/or the feeling of instant gratification. The snowball affect starts with paying off a loan with the smallest balance first and then moving on to the second smallest loan and paying that one off next. By paying off loans this way, you get the reward of seeing your debt to income ratio decrease quickly.
Paying loans off based on interest rate size is the same process as paying of loans based on balance size, but with one key switch….you’re paying off the loans with the HIGHEST interest rate first. This is called the avalanche effect. With the avalanche effect, your priority is not just getting out of debt, but saving money.
Paying off loans that will increase your beacon score is another way that you can approach debt-reduction. This option is the best if you’re planning for a big purchase in the near future. By making your credit score a priority, you’re increasing your chance of getting approved for a loan. Loans that affect your credit score the most are credit cards. You should always make sure your credit card debt is less than 30 percent of your available credit line.
No matter which of the three strategies you decide to take in paying of loan debt, make sure it’s the one that fits your business needs as a whole. By taking into consideration the ‘big picture’ for the business, it will help you to make the final decision on which loans to pay off first.
Pro Tip: When you are looking to make a big purchase, consider getting a quote from your local credit union. Credit unions tend to offer lower interest rates and better pay back options.
Software for Tracking Expenses
Every business needs a good accounting software that will track their income and expenses. When you use an accounting software, you can run reports that will help you in determining where you should start with loan consolidation.
The Green Executive® is partnered with both Quickbook and LMN software. While LMN software does not track expenses and/or debt, it does sync with Quickbooks accounting software. LMN is used for budgeting, estimating, and time tracking, BUT by adding Quickbooks to the LMN software, you are getting everything you need all in one place. Making it easier on the business when it comes to tracking and paying off debt.
If you’re ready to start consolidating your business loans and don’t know where to start, then book a 1:1 Consultation with The Green Executive®. With over 26 years of actively owning and managing a successful landscape company, we’ve got insider tips that will help you stay on track with your business finances and create a financial plan that works for you!