What Happens When You Can’t Pay Your Bills – By Dean Kaplan, CEO and President, The Kaplan Group
Financial rough spots and cash flow problems are a fact of life for almost all businesses, especially new businesses. The current health and economic crisis means it’s more likely than ever that a newer business will have trouble paying bills. Even well-established businesses are running into difficult times. Hitting a rough spot doesn’t have to mean the end of the world for you or your business. If you handle the crisis well, you can come out of the difficulty with your reputation and business intact.
Ways to Get More Money
It’s tempting to rush into solutions like a small business loan, or refinancing your home mortgage, but before you do anything you need to know why you’re doing it. If you are unable to pay your bills because your business is currently closed, or you sell a product or service people don’t need right now, then borrowing money may not be the right step. Before borrowing, think through how any new money you receive will help you. Can you pivot your business to accommodate the new situation? Can you offer a new service that will help you keep things running? If you are only borrowing money to pay debts, and do not know how or when you will be able to repay the new loan, this might not be a good solution.
It may go without saying, but you also need to make sure you fully understand the way your business is set up, and the implications for your personal credit rating and financial health. If you are a sole proprietorship or general partnership, you and your business are essentially the same person. You can be held personally responsible for your business debts. If your business is a corporation or LLC, you and your business are separate legal entities. But, you could become personally responsible for any debt you incur if you pay personal expenses from your business bank accounts or pay yourself ahead of creditors.
Once you understand your situation and have a plan for how you will use the money, you can begin to look for sources of financing. The federal government, the SBA, and states announced a variety of programs, many of which quickly ran into problems. New programs are in the works, so make sure you are keeping up to date with both federal and state news. These government loans, which are essentially grants if used per their guidelines, are designed for you to pay your employees and vendors and keep the economy moving. So don’t hesitate to apply and properly use the proceeds from these loans.
Opening a Line of Credit
Other options for short-term financing include low rate credit card offers, transferring your balances between credit cards, and opening a line of credit. A line of credit, or revolving line of credit, provides flexibility while helping you keep a consistent cash supply. Unlike a regular business loan, where you must make regular payments to repay the loan, a business line of credit is only repaid when you draw from the line and interest is only charged when you decide to use money. You will have a repayment period, but, like a credit card, you can repay the line early. A secured line of credit means that you put up collateral as a security deposit, as in most loans. If you do not have collateral, you may want to pursue an unsecured line of credit. Unsecured lines of credit tend to have higher interest and fees, since the lender is taking a bigger risk.
If you own business property with equity, you may want to consider refinancing it. Rates are very low right now. Refinancing may allow you to lower your mortgage payment, or even to get cash out of the property.
Invoice Factoring, Financing and Collections
If part of the reason you are having cash flow problems is because other people owe you money, you may want to look into either invoice factoring or financing. Invoice factoring is selling unpaid invoices to a third party. The factoring company pays you a lump sum in advance and the invoice is then paid to them by the customer. Factoring companies take a fee, which can be high if you factor all your receivables. Plus, if you have an invoice to a company that has been difficult to collect from, a factoring company may not accept that invoice. Invoice financing is similar but less expensive. Invoice financing is a loan based on the value of your accounts receivable. With invoice financing you keep control of the invoices and still have to do the collection yourself.
You may also want to consider hiring a collection agency. Reputable commercial collection agencies charge on a contingency basis, so they only get paid if you do, meaning there’s no initial outlay of money. If you have staff currently working on collections, hiring a collection agency for past due invoices could free them up to work on other more profitable projects.
Owing money is stressful, especially as a business owner. If you are experiencing financial difficulty try and approach the situation logically and calmly. Taking care of yourself will help you better weather this storm.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.