How to Use Bill Prioritization To Manage Small Business Debt - Fora Financial
Close
How to Use Bill Prioritization To Manage Small Business Debt
February 12, 2020
How to Use Bill Prioritization To Manage Small Business Debt

How to Use Bill Prioritization To Manage Small Business Debt

In a perfect world, you’d be able to afford all of your monthly business payments on time with zero stress. However, this is far from the reality for many small businesses. Some months, cash flow is tight and you’re not able to meet all of your obligations.  

According to one study, 82 percent of small businesses fail due to poor cash flow management. It doesn’t have to be this way for your business, though!

As a business owner, you can avoid some of the most common cash flow problems simply by using bill prioritization. In this post, we’ll explain which bills you should prioritize. That way, you can ensure that debt payoff doesn’t keep you from achieving your business’s financial goals!

Managing Debt In Business is Overwhelming

Surprisingly, many business owners don’t fully understand how to get out of debt and prioritize their payments.

Taking on certain types of debt can help your business in the long-term. Certain types of debt can help you increase cash flow and make important investments. But just like with consumer debt, businesses can overextend themselves and get into trouble.

If a cash flow crisis arises, you must determine how you’ll manage your most important payments. Of course, all of your debt is important, but certain payments come with more urgent consequences than others.

This is where bill prioritization can save your business. Knowing which payments are most important will help you stay on track and do what’s best for the company. 

How To Prioritize Your Bills To Best Manage Debt

Understanding how to prioritize your bill payments will make it easier for you to stay calm and handle the situation promptly. Doing this will make it easier for you to manage your debt in sizeable chunks. 

The right plan will depend on your business, but listed below are some general guidelines how you should prioritize your bills.

1. Taxes Owed To The IRS

Your federal, state, and income taxes should always take precedence over all other bills. That’s because technically, this money doesn’t belong to your business.

Neglecting to pay your taxes in a timely manner could result in fines and penalties. Plus, the IRS has the power to garnish your wages and make life challenging for you as a business owner. It’s also important to note that failure to follow employment tax laws could result in civil and criminal penalties

2. Payroll For Your Employees

Once you have your quarterly taxes covered, ensure that you have enough money to cover payroll every month. Your employees are the lifeblood of your business and without them, it can’t operate properly. 

In addition, it’ll be difficult to retain quality employees if you struggle to make payroll every month. Regardless of how much people enjoy their roles, they’ll find a new job if you don’t pay them on-time.

If you’re struggling to meet payroll every month, you may need to consider how many people you have on staff. Restructuring your company could make it easier for you to meet your financial obligations. 

3. Overdue Bill Payments

Once a bill becomes overdue by more than 60 days, you’re at risk for being sent to collections. And once a bill is sent to collections, it’ll be reported to the major credit bureaus. 

Your payments make up 35 percent of your FICO score, so being sent to collections will lower your credit score. Having a low credit score could damage your business’ reputation, making it harder for you to secure future business financing.

4. Operational Costs

Take a minute to consider the expenses that allow your business to remain operational. If you own a brick-and-mortar business, this probably includes costs such as rent, utilities, and internet. 

If you stop making the minimum payments, you risk having these services shut off. Due to this, making these payments every month should be a top priority. If you’re already overdue on operational expenses, your best bet is to contact your provider and ask for an extension.

5. Major Suppliers and Vendors

You have a mutually beneficial relationship with your suppliers and vendors. Each party depends on the other for their businesses to continue to run smoothly. 

Therefore, it’s important that you work to maintain a positive relationship with each one. If you’re unable to make a payment to one of your suppliers, this doesn’t have to damage the relationship. 

The important thing is to talk to them immediately and explain this situation. Most vendors are willing to arrange a payment schedule if you’re upfront with them about what’s going on.

Major Suppliers and Vendors

6. Insurance Costs

Insurance is important because, without it, you put your business at risk. Before skipping the payments and letting your coverage lapse altogether, talk to your broker. It may be possible for you to downsize your coverage instead. That way, you can save money on payments but still have some protection. 

7. Secured Debt

If you’ve personally guaranteed a loan, that means that you’ll be held liable if the company stops making the payments. And if this happens, your personal credit will take a hit and your personal assets will be in jeopardy. So, you should always prioritize these payments over other types of debt. 

8. Credit Card Payments

Credit cards are a form of unsecured debt which means that it’s not guaranteed by any type of collateral. If you stop making payments, there’s not much that the credit card company can do. Typically, their only option is to take you to court. 

Your business credit will be affected and you’ll have to deal with creditors, which can be stressful. Because of this, you shouldn’t paying off your credit card debt. However, this type of debt should be lower on your list of priorities. 

Still, keep in mind, the interest and late fees will continue to accrue over time. You may find that you owe a lot more once you’re ready to resume making these payments. 

9. Larger Bills

You probably have numerous large and small outstanding bills that you owe. In general, you should prioritize paying your larger bills first. Since the balance is higher, these companies will be more motivated to collect on the balance. They may also send you to collections sooner. 

110. Debts For Non-Essentials

Non-essential debt should fall to the bottom of your priority list. This would include any non-urgent subscriptions, membership fees, or repairs. Once you’re caught up on everything else, you can add these payments back into your monthly bill cycle.  

Bill Prioritization Can Ease The Burden

Paying off debt is stressful, but having a plan for how you’ll manage it can make things easier. The most important thing to do is to take action immediately and don’t put off dealing with the situation. 

The longer you put off dealing with the situation, the more it’ll cost you in interest, late fees, and damaged relationships. Many people will understand and be willing to work with you if you’re honest with them. Plus, dealing with the situation will put you on the path toward becoming debt-free. 



Frequently Asked Questions

If I’m struggling with cash flow one month, what bills should I prioritize paying first?

You want to start by making sure you pay your most urgent bills. For instance, failing to pay your quarterly taxes or payroll comes with steep consequences. Therefore, these payments should get top priority.

Missing a credit card payment can hurt your credit, but the consequences of this are more manageable. Therefore, this type of bill would get lower priority.

What should I do if I fall behind on my payments?

If you fall behind on your payments, don’t panic. Becoming overwhelmed or avoiding the situation altogether won’t help. Instead, devise a plan and decide what bills you’re going to pay first.

If you’re unable to make a payment, contact them and let them know what’s going on. It can be tempting to avoid the situation out of embarrassment, but this is never a good idea. Most people will be willing to give you some leeway on payments if you’re honest about what’s going on. 

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Fora-Logo_TEAL-KNOCKOUT
Post by:
Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].