Business in Debt: 6 Signs the Debt Now Runs the Company

Forget about how much debt you have right now. That only tells you how much debt you have. Here’s something much more important: Debt runs your company when you make decisions based on what you can pay, not what’s right for the business. Eventually, the debt becomes the boss. That’s when debt payments decide what gets paid and what doesn’t, not you. Sometimes it happens quickly, sometimes it happens slowly. So, here’s a list of the six warning signs that your debt, not you, is running the company.

Debt Payments Eat a Growing Share of Revenue

While most companies have some debt as part of their business plan, successful ones generate enough cash to sustain the business and meet all obligations over time. In contrast, when debt payments eat a growing share of revenue, something’s got to give. Growing obligations are going to force choices. At first, when you have a few dollars left over, you have a pretty wide range of things to decide on. But, when debt obligations start to eat a growing portion of the revenue, you start making decisions on where to make the sacrifices. That’s when cash really counts. And if debt repayments are the largest use of that cash, watch out: every payment comes with an instruction. First, figure out what percentage of revenue goes toward debt service. If that percentage is increasing quarter over quarter, it’s a sign that the debt itself may be running your company.

When there’s no cash left over after you make debt payments, you have to pay at least some vendors late, and it means managing which invoices are going to be late and who’s next in line. It’s an especially bad sign if you’re paying vendors later and later. It’s a normal part of running any business to manage when you pay people, but the decisions should be driven by goals, not your debt service. If you are juggling your bills from one creditor to another by cutting the check only to the one shouting loudest, guess what? Your debt is running your business. But one line that’s especially hard to cross: never, ever dip into the payroll taxes you’ve collected from employees to make debt payments. Any responsible person who willfully fails to pay withheld payroll taxes can face a 100% penalty from the IRS, called the Trust Fund Recovery Penalty. And making other debt payments, that aren’t tax payments, can show a willful act.

Taking a loan to pay off prior debt or interest on that prior debt causes the total debt to increase while leaving you more payments to meet for those debts. At every step the debt gets larger, not because the business is growing, but because the effort and work from the past have already gone to pay the last obligation. At this point, the business is becoming more like a sharecropper, making payments to the lender before there’s any money for anything else. Stacked business cash advances are a symptom of trouble. You may take on a cash advance to service the daily payment from the first one you took, as that first lender, too, took the payment from your revenue before you had a chance to use it. Along the way, you can wind up with multiple merchant cash advances, meaning that several daily or weekly automated withdrawals hit the same account. But often, it’s a losing battle because the principal plus high interest wipes out much of the income going forward.

A bank will give you less credit than your history and business activity merits when it sees that your rising debt affects your business’ ability to keep up with current debts. It’s a worrying sign that the bank believes there’s a threat that you won’t be able to make future payments. Small signs of this include the bank not automatically extending your credit line. It’s both a trend and a sign of trouble, since less credit means that the business has fewer options.

When you personally guarantee a business debt, it means that you have promised to take responsibility for the debt if the business can’t pay it. A confession of judgment, which is a contract saying the borrower admits in advance that, on a debt, they owe the lender money, can let the lender quickly get its money in court, short-circuiting parts of the usual process and making it easier and cheaper for the lender. Debt has a strong voice because lenders with Confessions of Judgment or guarantees have much more influence over decisions.

When a lien is filed against your property, or you receive a notice from your bank about a levy, it means that debt has now significantly changed the way you run your business. But at this stage, the lender is really at the wheel. The lender can file a public document, often called a UCC-1 financing statement, which makes public its claim to your property if you default. Having many lenders filing many liens may suggest the lenders don’t have faith in your ability to repay them, and they may be competing to make sure their own collateral claims come first. If your EIDL loans are more than 120 days delinquent, the SBA may refer the loan to the U.S. Department of the Treasury for further collection under the Treasury Offset Program (TOP). With your loan in Treasury Cross-Servicing, the SBA no longer services it.

Help Is Available

It’s not a sure thing that any given business will get into trouble with debt, nor is it written in stone that any business at risk of failure due to debt, has no choice but to admit defeat and wind the business down. In many cases, help is available and things can change. But, the key for many is to read the signs that there’s a problem in advance, and then take action before there’s no longer a choice to be made. Restructuring, which reshapes and restructures your existing debt, isn’t the same as consolidation, which layers a new loan on top of the old ones.

As for bankruptcy: It’s an option when it’s the right option. For a business, sometimes “right” means the company is beyond restructuring and new solutions won’t stop the likely failure. Under Chapter 11, which lets a company continue operating, there’s a small-business subchapter, called Subchapter V. Chapter 7 usually sees the business liquidate and wind down. Don’t assume that you know ahead of time which makes sense for your business, though, as that’s a bankruptcy attorney’s call. That said, no one should enter bankruptcy lightly.

A Handle on the Money Moving Through the Business

Of course, first you need a handle on the money moving through the business; if you don’t have a realistic understanding of monthly income and expenses, that’s the place to start. Next, make a list of everything you owe, ranked by what it would cost if you didn’t pay each debt on time. You don’t need to go to the last resort to see signs that the debt is running your company. Avoiding disaster means stopping before a crisis hits and being able to respond to the business needs. Act early, and the call on where to spend the next dollar, and where your business should be headed, comes from you.