Managing your business while steeped in debt feels overwhelming and can impair your ability to conduct everyday business tasks. When you have more bills than you can afford to pay, it’s difficult to know where to start. Here is a guide to assist you in identifying the top priority bills.
Choosing to pay essential bills first protects you from legal repercussions, enables business transactions to continue uninterrupted, addresses credits and loans based on preserving credit history, and identifies what to pay as a last resort.
Taxes – Money owed for federal payroll, state and income taxes must be addressed first, otherwise fines and penalties will increase your debt. The Internal Revenue Service has the authority to garnish wages, seize business property and equipment, and even gain access and take funds from an Individual Retirement Account.
Employee Payroll – State laws require that employees’ wages be paid on time. If you violate these laws, you may lose talented workers who require owed wages to pay personal bills and incur serious penalties.
Overdue Bills – Bills that are overdue by 60 days or more are known as aged payables, and can reduce your business credit, which may bar you from future financing possibilities. Aged payables take precedence because as long as they remain unpaid, they continue to gain interest. Communicating with creditors and even making partial payments is a step toward good standing.
Operating Costs – If you don’t pay utilities and rent, you’ll be left in the dark, unable to conduct the business required to pay your bills. Negotiate with service providers and your landlord to find a temporary solution if possible. Forbearance or partial payment plans are better than being locked out your office.
Major Vendors and Suppliers – Protect relationships with the vendors and supplies that must work in conjunction with you to continue profiting. Request to modify payment plans and be transparent about your situation and recovery plan. This may buy time for you to remain competitive, instead of ceasing production temporarily.
Secured Debt – Businesses that are corporations or limited liability companies are only liable for debts that are personally guaranteed. Rather than handling credit card debt, which is mostly unsecured, repay secured debts like home mortgage and auto loan, as these obligations are tied to collateral. Repossession of equipment for nonpayment can threaten your profitability.
Insurance – As you eliminate essential bills, make compromises by downsizing coverage, increasing deductibles or temporarily functioning without liability insurance.
Large Bills – These take priority over smaller bills because they pose a greater threat to your business credit history. Attempt to make partial payments before leaving these unpaid for an extended period of time.
Credit Cards – Because creditors must file a lawsuit against you and go through court proceedings to get a judgment, paying these bills is a lower priority in terms of keeping your business running. However, interest charges can add up, so make at least minimum payments once funds are available.
Non-essential Debts – The last debts to worry about are professional dues, advertising, entertainment and maintenance.
Don’t let debt paralyze your ability to function when the small profits you are earning can be leveraged to preserve the fundamental costs that will sustain your business. Learning which debts should be your primary concerns will enable you to slowly regain financial control.
Before another past due notice lands in your mail box, start paying your debtors.
About the Author: Jon Robinson is the Director of Operations for Debt.org, America’s Debt Help Organization.