Yep, it matters which debt you pay off first. See which debts should be paid off ASAP and what can wait.

In this post, we’ll break down how to prioritize your debts and make strategic decisions to secure your financial future, tailored for savvy entrepreneurs.

Why Debt Prioritization Matters

Debt can be a tool for growth or a burden that stifles your business and personal wealth. Prioritizing which debts to pay off first allows you to reduce financial stress, save on interest, and free up capital for investments that build your estate. The key is to differentiate between "bad" debt that drains resources and "good" debt that can fuel long-term wealth.

Debts to Pay Off as Quickly as Possible

1. High-Interest Consumer Debt (Credit Cards, Personal Loans)

   
   

   Credit card debt, often carrying interest rates of 15-25% or higher, is a wealth-killer. For business owners, carrying balances on personal or business credit cards can quickly erode cash flow. Similarly, high-interest personal loans (e.g., unsecured loans with rates above 10%) should be tackled aggressively.

   
   

   Action: Pay more than the minimum payment on these debts. Use the avalanche method—focus on the debt with the highest interest rate first while maintaining minimum payments on others. This minimizes the total interest you’ll pay over time.

   
   

2. Short-Term, High-Cost Business Loans

   
   

   Many entrepreneurs take out merchant cash advances or short-term business loans with APRs exceeding 20-50%. These can be useful for immediate cash flow needs but become unsustainable if not paid off quickly.

   
   

   Action: Prioritize these loans to avoid their steep costs eating into your profits. If possible, refinance into a lower-interest option to reduce the burden.

   
   

3. Tax Debt

   
   

   Owing money to the IRS or state tax authorities is a non-negotiable priority. Tax debt often comes with penalties and high interest rates, and unpaid taxes can lead to liens or asset seizures, jeopardizing your business.

   
   

   Action: Work with a tax professional to negotiate payment plans or settle tax debt. Pay this off as soon as possible to avoid escalating penalties.

   
   

4. Debts with Variable Interest Rates (if Rates Are Rising)

   
   

   Variable-rate debts, like some business lines of credit or adjustable-rate personal loans, can become more expensive if interest rates climb. Given the economic climate in 2025, with potential for rate fluctuations, these debts could become costlier.

   
   

   Action: Pay down variable-rate debts if you anticipate rate hikes, or consider refinancing into a fixed-rate loan for predictability.

   
   

Debts That Can Work in Your Favor

Not all debt is bad—some can be strategic tools for building wealth, especially for business owners with a long-term perspective. Here’s how to approach these:

1. Real Estate Loans (Mortgages, Investment Properties)

   
   

   Real estate debt, such as a mortgage on your home or investment properties, often comes with low interest rates (e.g., 3-6%) and tax-deductible interest. These loans can be beneficial because real estate typically appreciates over time, and rental income from investment properties can offset payments.

   
   

   Strategy: Don’t rush to pay off low-interest mortgages. Instead, use extra cash to invest in your business, retirement accounts, or additional properties that generate income. Ensure your mortgage rate is competitive; if not, refinancing could save thousands.

   
   

2. Low-Interest Business Loans (e.g., SBA Loans)

   
   

   Small Business Administration (SBA) loans or other low-interest business loans (e.g., 4-8%) can fuel growth by funding equipment, inventory, or expansion. These loans often have longer repayment terms, making them manageable.

   
   

   Strategy: Maintain these loans if the funds are being used to generate returns higher than the interest rate. For example, if a loan funds equipment that boosts revenue by 15%, the 5% interest is a worthwhile trade-off.

   
   

3. Student Loans (Low or Fixed Rates)

   
   

   Many 30-45-year-olds still carry student loan debt, often at fixed rates below 5%. Federal student loans may also offer income-driven repayment or forgiveness options, especially if you work with a financial advisor to optimize your plan.

   
   

   Strategy: Pay the minimum on low-rate student loans and redirect extra funds toward high-interest debt or investments with higher returns, like your business or a diversified portfolio.

   
   

A Practical Plan for Debt Prioritization

Here’s a step-by-step approach to manage your debt effectively:

1. List All Debts: Include interest rates, monthly payments, and outstanding balances. Use a spreadsheet or financial software to stay organized.

   
   

2. Emergency Fund First: Maintain a small emergency fund (e.g., $5,000-$10,000) to avoid relying on high-interest credit cards for unexpected expenses.

   
   

3. Use the Avalanche Method: Pay off high-interest debts first to save on interest costs. Alternatively, if you need quick wins for motivation, use the snowball method (pay off smallest balances first).

   
   

4. Leverage Good Debt: Keep low-interest, tax-advantaged debts like mortgages or SBA loans, and invest surplus cash in areas with higher returns (e.g., business growth, real estate, or retirement accounts).

   
   

Key Considerations for Business Owners

• Cash Flow is King: Ensure debt payments don’t strangle your business’s cash flow. Prioritize debts that free up monthly liquidity.

• Tax Implications: Interest on business loans and mortgages is often tax-deductible. Consult your CPA to maximize deductions.

• Investment Opportunities: Compare the interest rate on your debt to potential investment returns. If you can earn 10% in your business or market investments, it makes sense to keep a 4% loan.

• Credit Score Impact: Paying off high-interest credit card debt can boost your credit score, improving your ability to secure favorable terms on future loans.

  
  

Final Thoughts

As a business owner, your financial decisions ripple across your personal and professional life. Prioritize paying off high-interest, non-deductible debts like credit cards and tax obligations to protect your wealth. At the same time, strategically maintain low-interest loans like mortgages or SBA loans to leverage growth opportunities. By balancing debt repayment with smart investments, you can build a robust financial foundation for your business and estate.