Prioritizing Business Debt Payments[yoast-breadcrumb]
Prioritizing Business Debt Payments
If you run a business, chances are you’ve accumulated some debt along the way. Loans, credit cards, unpaid invoices – it can add up quickly. And when cash flow gets tight, you may struggle to pay everything on time. So how do you prioritize? What gets paid first, and what can wait?
There’s no one-size-fits-all approach, but following a few basic guidelines can help. Let’s walk through the main types of business debt and how to think about prioritizing them.
This one’s a no-brainer. Payroll taxes – money withheld from employees’ paychecks for Social Security, Medicare, and income taxes – MUST be paid on time. No exceptions. The IRS and state tax authorities have serious collection powers if you fall behind, like garnishing wages or seizing assets. Not fun. So be sure to set aside payroll taxes from each pay period and pay them when due, usually quarterly. Don’t even think about borrowing from this money to pay other bills!
Speaking of payroll, you’ll also want to prioritize paying your employees on time. Even if you’re waiting on invoices to get paid yourself, do everything possible to meet payroll. Employees rely on their paychecks to cover living expenses. If you short them repeatedly, they’ll soon be looking for another job. And who can blame them?
Loans You Personally Guaranteed
If you personally guaranteed any business loans or lines of credit, be sure to make the payments on time. Defaulting exposes you to collection actions against your personal assets – like garnishing wages, seizing bank accounts, or placing liens on your home. Not the end of the world, but certainly inconvenient. And it damages your personal credit score too.
Keeping a roof over your business’s head is obviously critical. If you fall too far behind on rent or mortgage payments, you could face eviction or foreclosure – disrupting operations. See if you can negotiate temporary relief with your landlord or lender when cash flow is tight. But don’t stop paying entirely without their consent.
Electricity, gas, water – can’t run a business without them. Falling behind will result in service shut-offs, so make utilities a top priority. See if your utility companies offer payment plans or financial assistance programs to help avoid disruptions.
Defaulting on a loan or lease for essential equipment like vehicles, machinery, or computers could force you to return the equipment – putting business operations at risk. Try to stay current on these payments or negotiate revised terms if possible.
Without inventory and supplies, many businesses can’t function. But you may have some flexibility here. Contact key suppliers and explain the situation. See if they’ll agree to revised payment terms or continued shipments on a COD basis. Offer to pay smaller amounts over time. Just keep the lines of communication open.
High interest rates make credit card debt expensive, but you typically have some leeway. Make at least the minimum payments, and try to pay down balances faster if possible. Just watch out for fees if payments are late.
Unpaid invoices from suppliers and vendors are common when cash flow suffers. Pay what you can, even if it’s just small, token amounts. This shows you’re making an effort and not ignoring them completely. Just be sure to prioritize any new purchases/orders on a COD basis.
Loans that don’t threaten essential assets like equipment or real estate usually rank lower in priority. But make an effort to pay something – defaulting destroys your business’s credit. Look into renegotiating terms if needed.
No one likes late fees and interest charges, but avoiding them shouldn’t be your top concern when prioritizing payments. Focus instead on the potential business disruptions mentioned above. Once you’re back on solid ground, you can try negotiating waivers on fees caused by late payments.
Obviously taxes are important, but certain types (like payroll taxes) are more critical than others in the short-term. If you need to make partial payments, tell the tax agency which obligations you’re addressing – like current payroll withholding, sales tax, etc. Don’t just send random payments.
Personal bills like alimony, child support, student loans, and your mortgage come after business obligations, as hard as that may be. Defaulting on business debts puts your livelihood at risk, while personal debts mainly damage your credit score and lead to collection calls. Still, make some effort to pay personal obligations if possible.
Strategies to Prioritize Payments
When juggling multiple obligations, here are some strategies that may help:
- Communicate with creditors/vendors – explain the situation and your payment plan.
- See if any creditors will agree to revised terms, payment plans, or temporary relief.
- Pay something on all debts if possible, even if it’s partial or late.
- Prioritize debts that threaten major business disruptions first.
- Pay down highest interest rate debts faster when possible.
- Consider debt consolidation loans or professional help if overwhelmed.
Don’t ignore any obligations completely – work in good faith with creditors and explain how you plan to get back on track. Most understand temporary cash flow issues as long as you’re transparent. By following these guidelines, you can minimize business disruptions and maintain operations until your finances improve.