How to Prioritize Paying Off Small Business Debt

How to Prioritize Paying Off Small Business Debt

If you run a small business, chances are you’ve accumulated some debt along the way. Loans, credit cards, unpaid invoices – it all adds up. And when cash flow gets tight, you may struggle to pay everything on time. So how do you prioritize which debts to pay off first? Here are some tips.

Assess Your Debts

First, take stock of everything you owe. Make a list of all your business debts, including:

• Business loans
• Credit cards
• Unpaid invoices
• Rent or mortgage
• Utilities
• Payroll
• Taxes
• Suppliers
• Equipment leases
• Any other outstanding balances

For each debt, note the amount owed, interest rate, minimum payment, and due date. This gives you a complete picture of your financial obligations.

Protect Your Assets

Next, figure out which debts put your personal assets at risk. If your business is structured as a sole proprietorship or partnership, you’re personally liable for all debts. But with an LLC or corporation, you’re only liable for debts you’ve personally guaranteed – like business loans or credit cards in your name.

Paying those guaranteed debts protects your personal assets like your house, car, or savings. Defaulting could allow creditors to seize those possessions. So prioritize debts with personal liability – don’t risk your home for the business!

Maintain Operations

Now look at debts that threaten business operations if unpaid. These include:

• Rent, mortgage, utilities – You could lose property or access.
• Payroll – Employees will quit without pay.
• Taxes – The IRS can freeze assets or shut you down.
• Suppliers/inventory – Can’t run without product.

Pay these debts before less vital ones like equipment leases. Keeping the lights on and staff paid is crucial for staying open.

Consider Interest Rates

Generally, pay debts with higher interest rates first. The higher the rate, the more interest you pay over time. Pay down credit cards (15-25% APR) before low-rate loans (4-8%). This saves money as you reduce the overall balance.

But also factor in minimum payments. If you miss credit card payments, you could face penalties, fees, and damage to your credit. Avoid this by paying at least the minimums each month.

Talk to Your Lenders

If you’re struggling to pay on time, communicate with lenders before defaulting. Explain the situation and ask about alternative repayment options. Many will work with you if they believe you’re acting in good faith. Options could include:

• Lower interest rate
• Extended payment term
• Altered payment schedule
• Waived fees

This builds trust and shows you’re committed to repaying. Lenders want to get paid, not seize assets or force bankruptcy.

Consider Debt Consolidation

Debt consolidation combines multiple debts into one payment. This can lower monthly costs and help cash flow. Consolidation options include:

• Balance transfer credit cards – Move balances to a new card with lower APR.
• Debt consolidation loans – Take out one loan to pay off others.
• Working with collection agencies – Settle account for less than full balance.

The downside is repayment term is often much longer. And discipline is required to not rack up new debt. But used wisely, consolidation simplifies repayment.

Cut Expenses

To free up cash for debt payments, reduce discretionary spending. Postpone unnecessary purchases, trim marketing costs, eliminate unused software subscriptions. Small cuts add up, letting you pay more each month.

A leaner budget also prepares you for any future income disruptions. Maintaining positive cash flow is key for debt repayment.

Consider Bankruptcy

If debts still overwhelm your business, bankruptcy may be an option. This legally discharges many debts and wipes the slate clean. But it damages your credit and has other long-term impacts.

Bankruptcy stops collections and foreclosures but your assets may be liquidated to pay creditors. It’s a last resort if you can’t pay and see no other way out.

Don’t Ignore Any Debts

Tempting as it is, don’t ignore lower priority debts like equipment leases or non-essential suppliers. Pay at least the minimum to avoid late fees, collections, and credit damage. Stay in communication with all lenders.

With a plan to direct payments, even modest amounts put toward your debt make progress. Stick to your budget, keep lenders informed, and chip away at balances. Be patient – over time your persistence pays off as you become debt free.

Prioritizing business debt repayment is challenging but crucial. Follow these tips to protect your assets, maintain operations, reduce interest costs, and achieve financial stability. With focus and discipline, you can eliminate debts and put your business on solid ground.

References

[1] How to Prioritize The Repayment Of Your Business Debt Obligations

[2] Debt Repayment Strategy – Prioritize Paying Off Debts | Equifax

[3] Prioritizing Which Business Debts to Pay – Nolo

[4] Prioritizing Business Debt Payments – Federal Criminal Lawyers

[5] Prioritizing Your Bills as a Small Business – Who to Pay and When – Debt.org

[6] How to Pay Off Your Business Debt, Fast – Bench Accounting