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Debt Avalanche vs Debt Snowball: Which Method is Best to Pay Off Your Business Debts?

Monday 31st October 2022

Andrea Cassidy

So, your business is in debt.

That's ok - it's an inevitable part of running a business.

But once you're in debt, you need to get clear on exactly how you're going to pay them off. Staring at a mountain of debt can feel incredibly overwhelming, and it's easy to just throw up your hands and give up.

But don't worry, we're here to help. In this blog, we're going to take you through the two key methods that businesses use to tackle debt: the debt avalanche and the debt snowball. Each has its pros and cons, so we'll take you through each one in detail to help you decide which is right for your business.

Let's get started.

The Debt Avalanche

The debt avalanche means attacking your debts with the highest interest rate first. The logic behind this method is that you'll save the most money in interest charges by tackling your most expensive debt first.

To do this, you'll need to make a list of all your debts, from the highest interest rate to the lowest. Then, you'll need to make the minimum payments on all your debts except the one with the highest interest rate.

Once you've done that, you can direct all your extra cash flow towards paying off the debt with the highest interest rate. Once that debt is paid off, you can move on to the next debt on your list and so on, until all your debts are cleared.

So let's say you have the following debts:

Debt 1: £5,000 at 10% interest

Debt 2: £3,000 at 5% interest

Debt 3: £2,000 at 3% interest

In this case, you would focus on paying off Debt 1 first, because it has the highest interest rate.

The advantage of this method is that you'll save a lot of money in interest charges over time. The downside is that it can take a long time to see results, which can be discouraging if you're struggling with a lot of debt. You may feel like you're going nowhere and lose momentum.

The Debt Snowball

This method is the polar opposite of the debt avalanche. With the debt snowball, you focus on paying off your smallest debts first, regardless of interest rate. So let's look at those three debts again:

Debt 1: £5,000 at 10% interest

Debt 2: £3,000 at 5% interest

Debt 3: £2,000 at 3% interest

This time, you'd focus on paying off debt 3 first because it's the least amount of money, even though it also has the lowest interest rate.

Like with the debt avalanche, you will still be required to make the minimum payment on all your debts each month to avoid late fees and penalties.

You might wonder why you would choose this method when it will prove more expensive than the debt avalanche, but its key advantage is that it's much easier to see results quickly - and humans love instant results. Just think of all those diets promising two-week total body transformations! But the thing about instant results is that they're not always the best thing for us in the long run.

With that being said, a boost to your motivation can be very powerful, and keep you on track to becoming debt-free.

So which method is best for your business?

There's no one-size-fits-all answer, but in general, the Debt Avalanche is going to help you pay off your debts faster and save money, which you will be able to reinvest in your business.

Quick wins can be very tempting, but the Snowball approach is going to keep you in debt for longer.

The best thing to do is to use the debt avalanche method with assistance from a supportive accountant or financial advisor who can help you make a plan and stay accountable. This will motivate you, help you to understand your progress in real terms and keep you on track to becoming debt-free.

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