It could happen to you: Sales fall off, customers don't pay on time, and your expenses rise. All of these factors combine to create a serious and sudden cash crunch. What strategies should you employ to work your way out of trouble and avoid creating more problems in the process?
With limited funds, you can't pay everyone everything that's owed. Be sure to set priorities to minimize additional problems and, to the extent possible, preserve your credit rating:
- Pay the government first. This includes "trust fund" money arising from employees' withholding and FICA payments as well as sales taxes. If you know you owe this money to the government but choose to pay other creditors instead, you can become 100% personally liable for the outstanding amount.
- Employees' wages. Not only is this morally right, but the failure to meet payroll can result in stiff state-level penalties. If delinquency runs for a certain period (e.g., a few weeks in some states), the state can shut down your business. What's more, you remain liable for the wages; they can't be avoided by bankruptcy.
- Vital services. You can't run your business without a phone or electricity, so pay utility bills and avoid shutoffs.
- Personal guarantees. If you gave your personal guarantee for business debt and the company has fallen behind, it's up to you to make good on your promise. If you don't, your personal assets can be applied toward this debt.
- Secured loans. If your company borrowed money that was collateralized with business equipment essential in running your company, keep up the payments to avoid seizure of the equipment. The same goes for vehicle loans. In some cases, the lender doesn't even need to go to court to get the collateral.
- Insurance premiums. Don't fail to pay mandated coverage, such as workers' compensation and unemployment insurance (ok, it's really a tax). Again, the failure to pay can lead to more problems later on.
These are only some of the items you'll want to pay first. Don't forget such items as the rent, payments to suppliers and independent contractors, and credit cards.
One way to ease a cash crunch temporarily is to find more cash. This may be possible by borrowing from family or friends, taking cash advances on credit cards, or selling receivables to a factor. Worst case: Consider tapping into your qualified retirement account. This is a last resort because it results in an immediate tax and permanently diminishes your retirement savings, but it's better than seeing your business go under if your cash problems are temporary.
Seek professional help
If you're drowning in red ink and trying to balance creditors' calls, you may not have the time or energy to run your business. Bring in professionals to put you on a budget while mediating a payoff solution with your creditors. Companies such as Corporate Turnaround can work with you to help resolve your debt problems and avoid the need for bankruptcy.