When Cash Is Tight, Who Gets Paid?

A simple guide to prioritizing your payments when the bills are piling up beyond control
6 min read
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Editor's Note: Starting this week, small-business expert and attorney Cliff Ennico will be contributing to this column on a regular basis. His practical advice is a welcome addition to this weekly resource.

In tough times, cash gets tight. Customers stretch their payments, or stop paying altogether, or try to renegotiate their deals with you. Meanwhile, you have to make payments to other people. There is usually enough money in the checking account each month to pay some of your obligations, but not nearly all. How do you decide who gets paid, who waits for payment and who doesn't get paid at all?

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Debt eating away at you? Keep your cool by " Keeping Your Shirt From Creditors. "

Make no mistake about it: In flush times, you want to pay everybody on time, but in bad times, this simply isn't possible. Remember the medics on M*A*S*H? When the helicopters brought in the incoming wounded, the doctors had to perform "triage" by separating the wounded soldiers into three groups: those who must be treated immediately, those who can wait a little while for treatment and those who are beyond treatment and must be left to die ("triage" simply means "to divide into three parts").

In business, "triage" means you take all your bills and divide them into three piles. The first pile gets paid on time, even if you have to hit up your credit lines to do it; the second pile gets paid as late as possible, with or without a personal apology to the creditor for the late payment; the third pile gets paid when you win the lottery.

Here are some suggestions:

Pile 1: People Who Get Paid on Time

  • Creditors who are essential to the continuation of your business. If you are a newsletter publisher, the folks who print your newsletter get paid when due, even if you have to hit up your credit lines to do it. If you don't pay your printers, they hold on to your latest edition, and you can't make money.
  • Key employees or contractors. If your business gets most of its sales over the Internet, the person who keeps your Web site up-to-date gets it back online when it crashes--that person is "mission critical" to your success. So pay them.
  • People who can easily sue you, or make your life legally miserable. That so-called "independent contractor" who works 60 hours a week for you; does not work for anyone else; has his dental bills paid by you; and has a cubicle, computer and secretary in your business office can do you a lot of damage if he ever squeals to the IRS that he was really your employee and you never withheld payroll taxes.
  • Debts that you have personally guaranteed. Most small-business credit cards, for example, have been personally guaranteed by the business owner. If you fail to make at least the minimum payment every month, they can put a lien on your house, your collection of Elvis Presley memorabilia, your children's college funds and your jewelry.
  • Your lawyers and accountants.

Pile 2: People Who Can Wait

  • People who yell and scream a lot. Creditors who realize they are near the bottom of your priority pile will often yell and scream frequently for their money, hoping that you will pay them off just to get rid of them and avoid further aggravation. This is a very effective strategy, especially when the amount involved is small. If you have any spare cash at all after taking care of pile 1, get rid of the screamers. You will live longer.
  • People who historically have waited for their payments. Just because an invoice says "payable net 30 days" doesn't mean you have to. Many creditors will wait 45 to 60 days as a matter of course before they make any demand for payment at all. Let them wait if they always have.
  • People who haven't yet demanded payment. Generally, people cannot sue to collect debts without first giving you written notice by certified mail, called a "demand letter" or "4-F letter" (4-F is lawyers' shorthand for "Fee-Fi-Fo-Fum," as in "the Giant is awake and is finally coming to get you, slow and lumbering though he may be"). If you owe someone money and haven't yet received a demand letter, you can breathe easily, at least for a while. If a demand letter arrives from a law firm in a faraway state where your business has no assets or legal presence (like an office), you can still ignore it--courts in your home state often will not recognize a "default judgment" rendered against you in another state. When a demand letter arrives from the largest law firm in your home city threatening to put a lien on your house, move the bill to pile 1.

Pile 3: People Who Don't Get Paid...Ever

  • Everyone who isn't in pile 1 or 2.
  • People who don't have a legal obligation to get paid. If someone does work for you and there is no written agreement as to payment (or verbal agreement with witnesses), who is to say that the work wasn't a gift? Shame on the contractor or supplier that does not insist on a written agreement before doing business with you.
  • People you can live without. If you have a dental practice and the subscription to one of your waiting-room magazines comes up for renewal, it's perfectly OK to let it go. Get rid of as many contractual commitments as you can, and focus on the few relationships that are absolutely critical to your business success.

Dealing with frustrated creditors is never easy, and often painful. When money is tight, however, it is important to remember that by being "cruel" to some people, you are being "kind" to others. Better to be cruel to creditors who don't add daily value to your business and kind to those that do than the other way around.

One more thing: if creditors start harassing you by calling you at home every night after 10 p.m. or before 8 a.m., leaving X-rated messages on your voice mail, or threatening to throw you in jail for failing to pay your debts, they may be violating the federal Fair Debt Collection Act. Talk to your lawyers about that statute, and make sure you pay them for their time!


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