How should you prioritise your debt repayments?
When your business debts begin to mount up, it can be difficult to know what to do. All of your creditors expect you to pay them, and some will be more vocal than others in demanding what’s due.
But it’s important you approach the situation with the best interests of your business at heart, and that’s why you must rank your assorted debts in order of priority.
Here’s how to prioritise your debt repayments:
What are the consequences?
Your most important debts are the ones which carry the most severe consequences for non-payment. The bigger the punishment, the more crucial you don’t fall behind.
Bearing this is mind, here are the business debts most likely to be highest on your list of priorities:
Rent
If you don’t pay your rent, you risk eviction. And, since most businesses cannot survive without their premises, you should treat this debt as a top priority.
Tax
When taxes go unpaid, HMRC has the power to seize your assets or even commence administration proceedings against your business. Make sure you pay the taxman before other creditors.
Utility bills
Non-payment of bills can lead to services such as electricity and water being cut off. You’ll need to avoid this at all costs to keep your business activities functioning, so don’t fall behind.
Wages
You’ll need your staff on side if you’re to overcome your debt worries, so you can’t afford to not pay their wages. Furthermore, you could receive a substantial fine for failing to do, which will only increase your debt problems.
Secured loans
If you have a loan secured against a valuable business asset, your creditor has the power to seize it should you not fulfil your payments. Prioritise this debt above others to avoid inflicting further harm on your business.
Is it essential to your business?
Once you have identified and prioritised the debts which carry the most severe consequences, you should also rank your remaining debts in order of priority. The first thing to consider is the importance of each debt to the functioning of your business.
Keeping your business operations running at full capacity is essential when dealing with debt, so make sure you prioritise those debts where non-payment could affect day to day business activities.
Pay highest interest first
As for the rest of your debts, it makes more financial sense to prioritise those with higher interest rates. Falling behind on these payments causes your debt to increase substantially, making it more difficult to repay in future. It’s best to get rid of any high interest debts as soon as possible, before focusing on the rest.
Smallest total amount
The smaller the debt, the quicker you can pay it off. If there’s no great difference in interest rates, try to clear smaller debts first, so you can put them behind you and reduce your total number of debts.
