Ranking Business Debt by Collection Risks and Impacts

Businesses of all sizes deal with debt. From startup loans, to accounts receivable, to lines of credit – managing debt is a key part of running any company. But not all debts are created equal when it comes to collection risks and impacts.

In this article, we’ll look at different types of business debt and rank them based on how risky they are to collect and the potential impact on the business if they go unpaid. We’ll also discuss strategies to mitigate those risks. The goal is to provide businesses with a framework for prioritizing their collection efforts.

Secured Debt

Secured debt is tied to an asset that acts as collateral. If the debt isn’t repaid, the creditor can seize the asset. Examples include:

• Business loans – Secured by real estate, equipment, accounts receivable, etc.
• Equipment financing – Secured by the equipment purchased
• Business credit cards – Can be secured by a CD or cash deposit

Secured business debt ranks low in terms of collection risk because the creditor has recourse via the collateral. However, the impact of default can be high if important assets are seized.

Strategies for Secured Debt

• Prioritize payments to avoid asset seizure
• Renegotiate terms if needed to avoid default
• Explore options to replace collateral if necessary

Unsecured Debt

Unsecured debt has no collateral tied to it. If the debt isn’t repaid, the creditor has limited recourse. Examples include:

• Credit cards – Personal and business cards with no security deposit
• Lines of credit – Typically backed by the borrower’s creditworthiness
• Accounts payable – Money owed to suppliers and vendors

Unsecured business debt ranks higher in collection risk because creditors have fewer options if you default. But the impact may be lower if no assets are on the line.

Strategies for Unsecured Debt

• Carefully manage cash flow to ensure payments
• Maintain open communication with creditors
• Get on payment plans if needed to avoid collections

Accounts Receivable

Accounts receivable is money owed to your business by customers. Collecting accounts receivable maintains cash flow.

A/R ranks high in collection risk because you rely on customers paying on time. Defaulted A/R can severely impact cash flow and profitability.

Strategies for Accounts Receivable

• Invoice quickly and follow up on past due accounts
• Offer discounts for early payment
• Require deposits and prepayments when possible
• Stop extending credit to habitual late payers

Judgments

Judgments are court orders requiring payment of a debt. They allow creditors to pursue assets, garnish wages, put liens on property, etc if you don’t pay.

Judgments have higher collection risk because courts are compelling payment. The impact varies based on judgment amount and enforcement actions taken.

Strategies for Judgments

• Communicate with creditors to negotiate settlement
• Explore bankruptcy if judgments are overwhelming
• Defend against judgments believed to be unlawful

Tax Debt

Unpaid taxes at the local, state, or federal level create tax liens against your assets and other risks.

Tax debt is difficult to collect and can lead to asset seizure, wage garnishment, and criminal penalties in some cases. The impact can be severe.

Strategies for Tax Debt

• Set aside money to pay quarterly estimated taxes
• Work with the IRS and state tax agency to get on payment plans
• Explore Offer in Compromise or other relief programs
• Address tax debt through bankruptcy if needed

Personal Guarantees

Personal guarantees on business loans make the borrower personally responsible for repayment. Creditors can pursue personal assets if the business defaults.

Guaranteed debt is risky to collect and can impact the guarantor’s personal finances if enforced. Think twice before guaranteeing debt.

Strategies for Personal Guarantees

• Avoid guarantees unless absolutely necessary
• Negotiate release of guarantees over time
• Contribute personal assets to business to avoid default

Ranking Summary

To summarize, here is a ranking of business debt from lowest to highest collection risk and impact:

1. Secured Debt – Low collection risk with collateral. Potentially high impact if assets seized.
2. Unsecured Debt – Moderate collection risk without collateral. Varies in impact.
3. Accounts Receivable – High collection risk relying on customers. High cash flow impact.
4. Judgments – High collection risk with courts compelling payment. Varies in impact.
5. Tax Debt – Very high collection risk. Potentially severe impact.
6. Personal Guarantees – Very high collection risk. Can impact personal finances.

Every business should rank and prioritize their debts based on the unique circumstances. Use this framework as a starting point and adjust the rankings based on your situation.

The key is staying on top of collections, communicating with creditors, and taking action before debts become unmanageable. Don’t let collection risks turn into real impacts on your business’s bottom line.

What strategies have you used to mitigate business debt risks? Share your insights in the comments!

References

Here are the references cited in this article:

• Debt Collection FAQs – Federal Trade Commission
• How Does Business Debt Collection Work? – Allianz Trade
• CFPB’s Debt Collection Rule – Consumer Financial Protection Bureau