Not All Bills Are Created Equal: Prioritizing Payments in a Cash Crunch
April 4, 2020
The Coronavirus pandemic has caused countless businesses to suffer unprecedented cashflow problems as they face mandatory closures and overwhelming declines in revenue in a short period of time. As business leaders throughout the country begin to respond to this challenge, many are facing tough decisions as they determine which expenses to pay with suddenly limited financial resources. Prioritizing bills and expenses is critical to a small business’s survival, particularly when facing an unexpected and unprecedented cash crunch such as the one that has been created by the Coronavirus pandemic.
While failing to pay any business debt will have some negative consequences, certain obligations are, in fact, more important than others. In terms of triaging business expenses, there are several key factors to consider, including the value of the service/product and the downside of failing to pay in a timely fashion. Business leaders need to ask key questions when making these difficult decisions:
- How critical is this expense to the survival of the business? How important is it to maintain this business relationship going forward?
- What is the likelihood that a creditor will discontinue providing goods or services if the expense is not paid in full? Does the business have an alternative if it cannot pay this expense?
- Can the business negotiate with this creditor for delayed or partial payments? If not, how likely is the creditor to pursue a collection lawsuit? How strong is the creditor’s financial position? How likely is the creditor to avoid bankruptcy themselves?
Considering these factors, here are some tips for business owners for prioritizing payments during the Coronavirus pandemic, starting with the most essential:
For most businesses, tax payments are of the utmost priority. First and foremost, the money collected (including payroll withholdings) by a business for federal payroll taxes (including Social Security and Medicare) as well as state sales and income taxes does not belong to the business – it belongs to the government. Further, businesses face stiff fines and penalties for failure to make these payments, and in some cases the IRS and state departments of revenue can hold business owners, directors, officers, and other individuals personally liable for not making those payments. The IRS has broad powers to garnish bank accounts, seize business equipment and property, and even, if the circumstances warrant, charge the business, its owners, directors, and/or officers with a crime for failing to deposit payroll taxes in a timely fashion. However, the recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) contains several provisions that address tax relief for businesses. For more specific information on those provisions, link here.
If you don’t take care of the people who work for you, you risk losing them and ultimately your business. Not only do most states and the Federal government impose penalties for not paying employees’ wages on time, but missing payroll may force employees to look elsewhere for other opportunities.
Key Vendors and Suppliers
Most businesses rely on key vendors and suppliers to operate. Of course, those vendors also depend on your business 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 make partial payments while deferring full payment. This will buy you some time to address your cash flow problems, while ensuring that your business partners remain solvent and keep serving you. 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. In preparing for these discussions, be prepared to be flexible, open, and honest. Be willing to have a frank discussion about how the Coronavirus pandemic has affected your business, your plan for recovery, and a realistic expectation for when you can make payments or otherwise catch up.
Secured Debts and Debts You Have Personally Guaranteed
For a business that is a corporation or LLC, the individual owners are only liable for debts that they personally guaranteed. In either case, the business needs to pay these obligations before any unsecured debts or loans are 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 down your business. If you have personally guaranteed the debt, then you are putting your own personal assets in jeopardy if the business does not make its payments.
For most businesses, workers’ compensation insurance is required and businesses can face stiff penalties and criminal liabilities for failing to pay the premiums. Other types of insurance may not be legally required but are still important to the continued success of the business. You don’t want to operate without liability insurance for any extended length of time, for instance, 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. As with key vendors, having an open and honest conversation with your insurance representative may well help guide you through the forest.
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 large bills carry more weight. In addition, large companies are more likely to report a delinquency to the credit bureaus and are also more likely to have the resources to pursue collection litigation. However, sometimes you might need to pay smaller bills to smaller companies that depend on your business for their survival. The best option is to try and pay at least something to everyone you owe, while being honest and upfront with them about your cash squeeze.
Utilities and Rent
In normal times, this category would be higher on this list because few companies can survive without utilities or a place to conduct business. However, most major utility providers have announced that they will not discontinue services for the duration of the Coronavirus pandemic. This benefit can provide short term relief and buy your business some time to work out a payment plan with the applicable utility provider. Just because the utilities will not be discontinued for nonpayment, though, doesn’t mean you can ignore these bills forever. The sooner a business reaches out to negotiate a payment plan, the more likely a service provider will be able to work with you.
Similarly, landlords are currently prevented from pursuing any eviction action for unpaid rent. The civil court system is closed until at least June 1, 2020 and there is a specific moratorium on evictions in North Carolina, so it is possible to delay an eviction for the short term. That being said, the moratorium does not mean that the failure to pay rent is permitted or excused; it simply delays the landlord’s ability to proceed with eviction during the crisis. If you are unable to pay rent, it is important to be proactive. Before simply failing to pay rent, reach out to your landlord to negotiate a forbearance or a partial payment if possible.
Credit Cards and Unsecured Lines of Credit
Credit card debt is normally unsecured debt, so a creditor cannot do much, other than negatively impacting your credit, without suing you and getting a court judgment. Thus, while these bills still have to be paid, they can take a lower place on your priority list. That being said, 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. In addition, credit card companies are often willing to settle an overdue balance for a percentage of the amount owed or a payment plan over time; a phone call to your credit card company may enable you to obtain some relief.
If you have further questions, please contact us.