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Debt Snowball vs. Debt Avalanche: Finding the Best Strategy for New Mexico Businesses
Meet Maria. She is the owner of a small business in Albuquerque, New Mexico. Like many business owners, Maria has faced financial challenges, especially when it comes to managing her debt. Maria has heard about two popular debt payoff methods – Debt Snowball and Debt Avalanche – but she is not sure which one is right for her business. Sound familiar? If you’re a New Mexico business owner facing similar struggles, this blog post is for you.
What is Debt Snowball and Debt Avalanche?
Debt Snowball and Debt Avalanche are two popular methods for paying off debt. Both methods involve making payments towards your debts, but they differ in terms of the approach and the order in which you pay off the debts.
Debt Snowball: With this method, you focus on paying off your debts in order of smallest to largest balance. You make minimum payments on all your debts except the smallest one, which you put extra money towards until it is paid off. After the smallest debt is paid off, you move on to the next smallest, and so on. The idea behind this method is to gain momentum as you pay off each debt, giving you motivation to keep going.
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Debt Avalanche: The debt avalanche method, on the other hand, focuses on paying off debts in order of highest interest rate to lowest interest rate. Like the debt snowball method, you make minimum payments on all debts except the one with the highest interest rate, which you put extra money towards until it is paid off. This method saves you money on interest in the long run since you are tackling the highest interest debts first.
Credit score requirements
Both debt snowball and debt avalanche do not require a specific credit score to be effective. The most important factor is to have a steady income that allows you to make payments towards your debts. However, both methods may take into account your credit score when determining the interest rate on your debts.
How long approval takes
Approval for these debt payoff methods is not a formal process, so there is no specific time frame for approval. It mostly depends on your ability to commit to making payments towards your debts and your financial situation.
3-4 Common Mistakes New Mexico Business Owners Make
When it comes to managing debt, there are a few common mistakes that New Mexico business owners make. These mistakes can hinder their progress towards becoming debt-free and may even result in more financial struggles. They include:
- Not having a budget or financial plan in place: Many business owners jump into debt payoff without having a clear understanding of their financial situation. This can lead to overspending and not making enough progress towards paying off debt.
- Ignoring high-interest debts: Some business owners may overlook high-interest debts and focus on paying off smaller debts first. However, this can result in paying more in interest in the long run.
- Not exploring all debt payoff options: Debt snowball and debt avalanche are not the only methods available for paying off debt. It’s important to explore all options and choose the one that works best for your specific business and financial situation.
- Not seeking professional guidance: Managing debt can be overwhelming, and it’s okay to seek help from a financial advisor. Many business owners make the mistake of trying to handle it all on their own, which can lead to financial mistakes and setbacks.
A Real Case Study: Maria’s Business in Albuquerque, New Mexico
Let’s take a closer look at Maria’s business in Albuquerque, New Mexico, to see how the debt snowball and debt avalanche methods can affect her debt payoff journey. Maria has three different debts:
- Credit card debt with a balance of $5,000 and an interest rate of 18%
- Business loan with a balance of $10,000 and an interest rate of 10%
- Personal loan with a balance of $15,000 and an interest rate of 8%
Using the debt snowball method, Maria would start by paying off her personal loan since it has the smallest balance. She would make minimum payments on the credit card debt and business loan while putting extra money towards the personal loan. Once the personal loan is paid off, she would move on to the credit card debt, followed by the business loan.
On the other hand, using the debt avalanche method, Maria would start by paying off her credit card debt, since it has the highest interest rate. She would make minimum payments on the personal loan and business loan while putting extra money towards the credit card debt. Once the credit card debt is paid off, she would move on to the business loan.
Using the debt snowball method, Maria would pay a total of $29,000, including $4,831 in interest. Using the debt avalanche method, she would pay a total of $28,000, including $3,831 in interest. In this case, using the debt avalanche method would save Maria $1,000 in interest payments.
FAQ: 5 Questions Business Owners Ask About Debt Payoff
1. Which method is better – Debt Snowball or Debt Avalanche?
There is no one-size-fits-all answer to this question. Both methods have their own advantages and disadvantages. The debt snowball method may be more motivating for some people, while others may prefer the debt avalanche method to save money on interest. It’s important to consider your financial situation and personal preferences when choosing a method.
2. Can these methods be used for all types of debt?
Yes, these methods can be used for most types of debt, including credit card debt, personal loans, and business loans. However, it’s important to note that certain types of debts, such as mortgage loans, may have different payment structures and may not be suitable for these methods.
3. How long does it take to pay off debts using these methods?
The length of time it takes to pay off debts using these methods depends on various factors, such as the amount of debt, interest rates, and your ability to make payments. It’s important to have a realistic timeline and to be consistent with your payments to see progress.
4. Can I switch between methods?
Yes, you can switch between methods if you feel that a different approach would work better for your business. However, it’s important to stick to one method and not switch back and forth frequently, as this can hinder your progress towards becoming debt-free.
5. Should I seek professional guidance when using these methods?
While it’s not necessary to seek professional guidance, it can be helpful to consult with a financial advisor when managing debt. They can provide personalized advice and help you make informed decisions about the best method for your specific situation.
Are you a New Mexico business owner struggling with debt? At GHC Funding, we understand the unique challenges that businesses in cities like Albuquerque, Santa Fe, and Las Cruces face. Our team of experienced financial advisors can help you explore all debt payoff options and find the best solution for your business. Contact us today to learn more about how we can help you become debt-free.
Don’t let debt hold your business back. Contact GHC Funding today and let us help you find the best debt payoff strategy for your New Mexico business.
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