THE IMPORTANCE OF PAYING BUSINESS DEBTS ASAP
When a business runs short of cash, it’s common for the owners to start paying bills late—sometimes even with tax and employee super.
First, you should know that skirting tax obligations is an absolute no-no and a sign that you may be at (or past) the point where you should close down.
Even paying garden-variety bills late is almost always a poor approach, for all the reasons discussed below.
Why Paying on Time Makes Sense
What about the argument some small business commentators make that by keeping accounts current you are paying out money before you absolutely have to—something you can’t afford to do in tough times? Sorry, in the real world of small business this may not make sense for six reasons.
Saving Your Good Name – The cost of paying on time is low as compared to almost anything else you can do to maintain a good reputation in your business community. When you pay late, you kick your cash problem down the road a few months at great cost to your credibility, something that is crucial to preserve in tough economic times. To survive, your business will eventually have to pay its debts, so by putting them off a few months you gain nothing but risk losing your good reputation.
Saving Money – Paying early can get you discounts that net you more cash then you could earn in interest by holding onto the money longer. Don’t be shy about asking for deeper discounts than your vendors initially offer. Especially if you have the cash to pay early, you should be able to achieve reductions as high as 10% to 15%.
EXAMPLE: A few months after the GFC hit and new construction plummeted, a construction company’s bank threatened to pull its line of credit. This was avoided when we arranged a sizeable business loan for the company.
Now with both the loan money and line of credit to draw on, the construction company had adequate cash, but no profits. So after making lots of money-saving cutbacks, the company called its ten largest suppliers with a simple proposition: For the next six months, the company will pay on delivery for all orders, in exchange for a 15% discount. Five suppliers—themselves short of cash—immediately agreed, and two more said yes when it became clear they would otherwise lose the business. The three holdouts were easily replaced by companies that realized that when times are tough, everyone has to give a little.
So the moral of the story is – pay on time and SAVE! Save Money, and Save your reputation.