With many strains on their finances, small business owners can often find themselves either facing bankruptcy or on the path towards it. Here, director at Trust Deed Scotland, Jon Paul Kelly, provides five ways to avoid bankruptcy as a small company.
Even a business built upon an original, solid idea can fail if your financial and managerial skills arent up to scratch. Here’s five ways to avoid bankruptcy.
(1) Recognise there’s a problem, and don’t make it worse
If your business is experiencing financial difficulties, it’s important to recognise this fact and take immediate precautions to prevent the situation from worsening. This means either saving it, or shutting it down on your own terms.
Of course, the most obvious sign that something is wrong is if you’re regularly not making money when you should be. Obviously you can’t expect to make a profit straight away, but if it’s been a year or two, you might want to reconsider the company’s future.
After acknowledging the situation, you need to be careful that you don’t make things worse. Financing with a credit card, for example, can expose you to high interest rates, and often leave you, as the business owner, responsible for the debt. Foregoing taxes in order to meet short-term payments is also a bad move.
(2) Keep personal and business funds separate?
Another mistake many entrepreneurs make is using personal finances to make up where their business is falling short.
You need to separate the business and yourself, because you’re the founder, not the business. The money brought in by your company is for maintaining and growing the business.
A good way to keep your finances separate is to have yourself on the payroll like all your employees. This also ensures you’re making money for your business, and stops you from draining money for personal use.
If your company is financially weak, making yourself financially weak as well by using personal savings, particularly retirement funds, to meet payment obligations will only make things worse.?(3) Adjust your budget to suit your new situation
If you’re not making money and debts are beginning to mount up, you need to revise your company’s budget and make it work for your new situation. Allocate enough to cover rent, utility bills, wages, and any materials/costs crucial to your business. You should then use most of what’s left to work on paying debts if you have credit card debts, make sure you’re paying off more than the minimum.
You could also postpone employee rewards for the time being, although you should approach this carefully and with sensitivity make it clear that it’s not to do with the quality of their work, and perhaps look at scaling down to a more affordable workspace.
If some people can work from home without affecting their work, for example, you could relocate to somewhere cheaper and save money on rent.
(4) Prioritise debt payments and talk to creditors
When it comes to keeping up with debt repayments, you should pay secured creditors with the highest interest rates first. With unsecured creditors and vendors, it’s best not to play favourites and pay all of them something. You don’t want to create more problems for your business if you’re already under pressure.
It could also be worthwhile speaking to creditors and explaining the situation that you’re in, they may have a hardship plan that could ease your payment terms. Alternatively, they might be able to offer a payment plan or reduced settlement amount.
In this case, be upfront about the fact that the larger the reduction of debt, the quicker youll be able to pay them something.
(5) Seek help
If your business is in trouble, don’t be afraid to ask for help, particularly if you’re finding it difficult to negotiate with creditors. Nonprofit organisations offer free advice and alternatives to bankruptcy, while credit counselling organisations can help you to work with creditors.
As an entrepreneur, it’s likely that you’ve put a lot of yourself into your business, and will either be late or unwilling to recognise that you’re in trouble.
An independent adviser can provide the necessary objectivity to help set you on the right path whether that’s reestablishing your business’s financial stability, or closing down the company in the most positive way possible.
Jon Paul Kelly is director at Trust Deed Scotland, a debt management firm.Lessons in innovation from four entrepreneurial greats