How to Pay Off Business Debt: 6 Orderings That Change the Total Cost

The order in which you pay off your business debts affects the total amount of money you pay, as well as how long it takes you to pay off your debts completely. Loans with a high interest rate will grow over time if they are not paid off, while loans with a low interest rate will be less expensive over time. For this reason, you should pay off loans with high interest rates (e.g. credit cards) before you pay off loans with low interest rates (e.g. mortgages).

One exception is a merchant cash advance: it looks like a loan but it’s really a purchase of future receipts, so paying it faster does not lower how much you’ll pay.

The six orderings are these. Pay the IRS first. Pay the highest interest rate before the smallest balance. Avoid rush orders on MCAs unless you’ll save on fees. Credit cards are best paid early. Prepay the SBA 7(a) after the first year. Beware the tax bill that comes with a settlement.

Pay tax debt, first. The IRS will penalize you with a 0.5% failure-to-pay penalty every month - or part of a month - your tax debt is unpaid. After the IRS sends a levy notice and at least 10 days pass, the penalty jumps to 1% a month. They cap the charge at 25% of what you owe. The IRS penalty isn’t the only reason to clear the taxes now. They also charge interest on overdue amounts. At 7% a year, compounded daily (the rate for the fourth quarter of 2026), a tax balance grows on two fronts at once.

You must stay current on all of your debts while paying down some ahead of others. So first, check that you can comfortably pay the full amount due on all of your accounts. If you can, start paying ahead on the account with the highest interest rate (the ”avalanche” method). Or you can pay ahead on the account with the lowest balance and work your way up (”snowball” method). The avalanche can save you more money. The snowball gets you to a “win” sooner, but it may cost you more.

Merchant Cash Advances

What you owe on an MCA is determined the minute it’s funded. That amount is the advance times the factor rate. For example, $50,000 x 1.30 = $65,000 owed. Whether you pay that in 4 months or 9 months, you still owe $65,000. And, unlike a traditional loan, an MCA has no interest rate ticking up the cost over time. So, while all the other debts will get more expensive if you pay them slower, the MCA won’t - its cost is set.

Federal Reserve research suggests merchant cash advances can work out to an equivalent APR above 80 percent, depending on how quickly the business repays it. If you pay an MCA faster, its effective APR is higher because the original price of the advance (factored in from day one) gets divided over fewer months. That said, some funding companies reduce the cost for early repayment. If your agreement lets you and $40,000 is left, settling at 10% off means you pay $36,000 instead, saving $4,000. Not all MCAs do this, so ask before you sign.

There are benefits to clearing an MCA faster than required. First, the UCC-1 lien gets terminated, freeing you to borrow again if needed. And, the daily or weekly ACH deductions stop, giving you back full use of your money. Plus, you may qualify for a renewal more quickly. Funding companies often want to see you pay 50%-60% of your debt before renewing you. An MCA that debits on fixed dates may let you reduce your balance with a partial payment, but your debit schedule (and total cost) may stay the same, just over a shorter time. Ask the lender before making a partial payment.

Business Credit Cards

Credit cards get the bad rap, but business credit cards can be costly, so don’t leave them for last. The CARD Act protects consumers from rate hikes and fees that can surprise them, but these protections aren’t generally extended to business cards. So there are fewer rules on how quickly rates rise and fees add up.

If your SBA 7(a) loan has a maturity of 15 years or more, you’ll owe a prepayment penalty if you pay more than 25% of the loan’s highest outstanding principal within the first 12 months after disbursement. The penalty is 5% of the total prepaid. So, if there’s cash to spend early, don’t burn it on the SBA loan.

If you negotiate a lump-sum settlement on a debt, the amount you don’t have to pay - known as discharged debt - is generally taxable that year. So, unless you are insolvent or in bankruptcy, it’s smart to budget for taxes on that savings.

Written Payoff Quote

Ask the creditor for a written payoff quote as of a date you pick. Send payment by wire transfer or ACH as the creditor prefers. Then ask the creditor for written paid-in-full confirmation plus filing of the UCC-3 termination. A UCC-3 cancels the UCC-1 lender’s lien on your company, clearing the way for you to access other financing, if needed.

List every debt. Then mark which costs grow every month and which costs were set at signing. Steer the extra cash to the debts that grow every month - they need the help most.