Business Cannot Pay Bills: 7 Triage Steps for This Week

You’ve fallen behind and can’t pay the bills this week. Don’t hide from your debt. Don’t try to catch up by taking on more debt. Put your loan, account pulls, payroll taxes, and guarantee on one page and do honest math on the best way to proceed. It may be refinance, it may be hardship, but you may want to seek counsel from a lawyer. You can’t hide a problem. You can hide from one for a little while, but it just gets worse if you do.

How Much Money Is Due to Whom, and When

First, start by gathering information. Every creditor has a particular payment amount due on a particular date. Go through your books or pull your billing history. By the end of the process, you should be able to put down how much money is due to whom, and when. Remember that, for some loans and tax items, there may be penalties and fees if you pay late.

Second, go through your bills and find all of the automatic debits and subtractions. This may be loan payments, merchant services charges, or taxes. All the companies that feed off your bank account do so on a different schedule. Find out when your payroll taxes and loan repayments hit. If you have a merchant cash advance (MCA), it is debiting your bank account every day or every week. That can mean no money for payroll or utilities. Organize this into a timeline of all the payments due. What’s due today? What’s due tomorrow?

Third, payroll taxes come first. Deductions from employees’ paychecks are held in trust for the government. If the business fails to remit them, the government can hold you personally liable. A common mistake is paying your bank loan and ignoring payroll taxes. If the IRS believes that you have been taking the payroll taxes and spending them, they can charge you a 100% penalty on the value of the money that you did not remit on behalf of your employees. The penalty is called the Trust Fund Recovery Penalty. The worst thing to do is ignore payroll taxes in the hope that you will catch up at a later date. On payroll taxes, the IRS starts with a deposit penalty, which is 10% of the unpaid amount. This penalty applies if you are more than 15 days late in depositing. The deposit penalty climbs to 15% if the taxes are still not paid 10+ days after the IRS’s first notice.

Fourth, if you borrow money for your business, the loan documents may include a personal guarantee. It is very common for lenders to take a personal guarantee on a small business loan. With a personal guarantee, you promise to pay the loan if the business cannot. Make sure you have reviewed your loan documents. Is there a UCC-1 filed against the business property? Many folks think that if a debt is against the business, the lender cannot pursue the owner’s home or savings. That’s not the case. If there is a personal guarantee, it is your personal assets that are at stake.

Fifth, add up how much is due from you. Include your payroll taxes, utilities, and loans. Then do the math. Nothing crazy, just honest math. No magical thinking here. Is it possible for you to make up the payments that are due, plus whatever you owe from last month? If not, don’t guess. Don’t make promises until you know exactly how much money you’re actually working with.

Sixth, if you haven’t run through steps 1-5, you don’t know enough to decide whether to take on another debt. Many people believe a cash advance will help them catch up on debt. Often folks use the new loan to take care of the old loan. More to the point, the loan is used to take care of last month’s loan payment. A few payments later, the same thing happens again. You are not “catching up,” you are taking on more debt.

Three Big Choices

Seventh, if the bills are still high and they can’t be paid, it is time to consider what’s next for you. The goal is to survive with what money you have. The three big choices are (1) refinance your loan, (2) set up a hardship plan, or (3) look for a lawyer. None of these options is a quick way to end your financial problems. It is a way to start digging out of the hole you are in.

If your business can afford to pay your outstanding debts, if you only need time to make the payments due, you may be able to refinance your debt. Lenders may be willing to work out a repayment plan or hardship plan with you, but they can’t help you unless they know that you need it. Be honest with lenders about what’s going on. Be sure to get any agreement in writing. There are no guarantees here.

Owe back taxes? A business can’t set up a payment plan online. To set up a payment plan with the IRS, call the number on the IRS notice or 800-829-4933. For COVID-EIDL loans, if you cannot afford your current payment, you can ask to pay half of the payment each month for six months. If your loan is under 90 days past due and the business is still open, you may qualify. Interest will continue to build during the six months, so the loan will be larger when the payments return to normal.

If you have been served with court papers, stop doing your own thing and call a lawyer immediately. Don’t wait for the pressure of creditor phone calls and lawsuits.

A Clear Picture of Your Business Finances

Gather all of your loan papers. Get your merchant account statements. Pull your bank statements. You need a clear picture of your business finances before you go to the lenders. Until you know what money you have, where it is going, and what you owe, you can’t start to fix the problem.