Operating a startup or a small business is never easy, and sometimes it can be impossible to pay all of your bills on time. Late-paying clients, seasonal lows, and downturns in the economy or your field are all factors that can prevent you from being able to pay your expenses on time, and repeatedly failing to pay your bills can result in claims filed against you by your landlord, creditors, or unpaid employees. However, there are some steps you can take to get back on track and become current on your bill payments.
Collect Unpaid Receivables
If your clients are sending late payments or not paying at all, re-bill them as a reminder that they owe you for your services. If reaching out to the client cordially doesn’t work, you could consider setting up a payment plan with him or her. Sending a demand letter through your attorney or filing with a small claims court could also be a viable final option if your client still has not paid you.
Strategically Cut Salaries
If you have employees and you need to cut salaries, be sure you are familiar with your city and state’s laws about payroll and employee compensation. You should consider cutting your own salary first and speaking directly with other managers to see if they would be willing to take a pay cut for a short amount of time. Be up front to your employees if you need to temporarily cut their salary or if you can’t pay them.
Use all of your available resources
If your problems truly are temporary, you may want to consider selling off high-value inventory or using lines of credit to get quick access to cash and pay your bills on time. This “quick-fix” isn’t something that should be repeated often, and if you’re unsure about this step you may not want to use your credit or acquire more debt.
Prioritizing Bill Payments
You should create a plan to prioritize your bill payments in case your business suffers from cash flow problems. Some of the essential payments you should prioritize are:
– Taxes: this includes the money you collect for federal payroll taxes, state sales taxes, and state income taxes. Failing to pay your taxes in a timely manner can result in fines and penalties from the IRS, which could include wage garnishment, seizures of property, or even criminal charges against you.
– Payroll: Some state laws penalize you for failing to pay your employees on time, and not paying your employees could make you vulnerable to legal claims. Additionally, you could lose your employees if you habitually fail to pay them.
– Overdue bills: Also known as “aged payables,” these bills put your credit score at risk. They also often accrue interest (and possibly late fees,) which make them more difficult to pay off the longer you leave them unpaid.
– Utilities and Rent: Your service providers can revoke their services if you fail to pay your bills, and your landlord can evict you for nonpayment of rent. Try to negotiate payment plans with your utilities providers and landlord. You might want to consider forbearance or a partial payment plan if you’re seriously behind on your payments.
Sometimes, you may be unable to pay all of your bills on time. In such cases, communication is key–talk to clients who are late with payments, talk to your employees about what’s going on with your business, and talk to your creditors. Don’t overdramatize your problems, but don’t try to hide them, either. Be honest with all the affected parties and consider all of your options before deciding to cut salaries, liquidate inventory, etc. Planning to encounter these situations before it happens may also allow you to mitigate the damage that your business might suffer during an economic downturn or off-season.