Should a sudden financial calamity or cash-flow crisis arise in your small business, you must have a plan in place for making essential payments — assuming you want to keep your doors open. While ignoring any business debt will have some type of negative consequence, certain obligations are more important to address than others. If you get into trouble, you may want to consult a professional financial adviser.
Make a Plan
Here is some advice on how to prioritize the payment of your small business bills, starting with the most essential:
- Taxes: The money that you collect for federal payroll taxes (including Social Security and Medicare) and state sales and income taxes does not belong to you; it belongs to the government. And if you don’t pay these taxes at the appropriate time, you will face stiff fines and penalties. The Internal Revenue Service (IRS) has broad powers to garnish wages, take control of business equipment and property, and even seize funds from an Individual Retirement Account (IRA). It can also charge you with a crime for failing to deposit your payroll taxes appropriately.
- Payroll: Not only do some state laws impose penalties for not paying your employees’ wages on time, if you don’t take care of the people who work for you, you risk losing them and your business. You may like to think of your employees as a family, but missing payroll may force them to look for other opportunities.
- Aged Payables: An aged payable is a bill that is overdue by 60 days or more. These bills put your business credit score at risk, making it more difficult to secure future financing. Also, these outstanding balances accrue a lot of interest, making them more expensive with each passing day. Creditors whose bills are aged are the first people you should call to try and arrange a payment plan. Even offering partial payment is better than ignoring them.
- Utilities and Rent: You can’t run a business without electricity and a phone line. Lights, Internet service, heating and air conditioning, etc. are essentials. If you are behind on your utility bills, your services can be cut off and leave you in the dark — literally. Try to negotiate a payment plan with your service providers, and don’t assume they won’t pull the plug if bills are left unpaid. Also, your landlord can evict you for nonpayment of rent. If you are seriously overdue, you’d better try to negotiate a forbearance or a partial payment before the locks get changed.
- Key Vendors and Suppliers: You depend on your key vendors and suppliers for your business to operate. Of course, they also depend on you for their companies to thrive, so it is in everyone’s interest to keep these relationships healthy. Talk to your business partners and let them know your situation. Try to negotiate a payment plan that allows you to pay partial amounts while deferring full payment. This buys you some time to address your cash flow problems, while ensuring that your business partners stay solvent. If you have been a good customer in the past, it’s more likely that your key associates will agree to some sort of payment modification.
- Secured Debts and Debts You Have Personally Guaranteed: If your business is a sole proprietorship or partnership, you are personally liable for all of your business debts. If your business is a corporation or LLC (Limited Liability Company), you are only liable for debts that you personally guaranteed. In either case, you need to pay these obligations before any unsecured debts or loans get reimbursed. If the debt is secured by a specific piece of collateral that is crucial to your business, repossession of the item for nonpayment could shut you down. If the debt has been personally guaranteed by you, you are putting your own personal assets in jeopardy.
- Insurance Premiums: You don’t want to operate without liability insurance for any extended length of time, but if you need to eliminate a specific payment, you might have to take the risk. Before letting insurance lapse, however, try to reduce premiums by downsizing coverage or increasing deductibles.
- Large Bills vs. Small Bills: Keeping your business credit score high is an important consideration when you are forced to prioritize your payments. Missing large bills will have a greater negative impact on your credit score because they carry more weight. Also, large companies are more likely to report a delinquency to the credit bureaus. However, sometimes you might need to pay smaller bills to smaller companies that depend on your business for their survival. Again, the best option, if you have enough funds, is to try and pay at least something to everyone you owe, while being honest and upfront with them about your cash squeeze.
- Credit Cards: Credit card debt is normally unsecured debt, so a creditor cannot do much without suing you first and getting a court judgment. So while these bills still have to be paid, they can take a lower place on your priority list. But remember: penalties and interest charges on credit card balances can add up quickly. Try to make at least the minimum payment each month to avoid mounting debt.
- Other Business Debts: Your lowest priority is other, less essential business debts such as professional dues, magazine subscriptions, advertising, entertainment, non-crucial repairs and maintenance.
The Small Business Administration (SBA) estimates that 50 percent of all small businesses fail within five years because they are undercapitalized. Preparing for a cash flow problem in advance, by putting aside sufficient funds to pay your bills and creditors during sluggish economic times, is your best defense against financial trouble down the road.