What Really Happens Financially When A Business Fails
Nobody plans for failure when they start a business. And when the worst happens, a lot of small business owners are caught completely off guard by the financial fallout. Most people just haven’t thought about what happens to their financial obligations if they close their doors.
The truth is when a business fails, the leases, contracts, or loans taken out in the business’s name don’t go away. There may no longer be a business generating income to pay them, but they still must be paid back or honored. In fact, depending on how the contract is structured, the business owner may be personally liable for the remaining balance.
Sound scary? It usually is. On top of losing the business, you also lose the income of your job from the business, and you may have invested all your savings to prop the business up before it failed. Now you’re stuck paying off loans, making lease payments, and handling other financial obligations attached to the business.
It’s incredibly common to go into debt to launch a small business. Unfortunately, the risk of taking on debt is often ignored in the excitement of getting started. If you start a business, you certainly have confidence that your product or service will be in-demand and profitable. But until your idea is proven, you may risk being personally in debt for many years if your business fails.
I should note that if you’re navigating business failure, you may need to seek legal advice to navigate your specific circumstances. I can’t provide legal advice about your contracts or your specific obligations, but I can tell you that they won’t disappear if your business fails.
If taking on debt and then failing is so high stakes, you may be wondering, is there an alternative? Fortunately, it is possible to run a business differently. Here are three strategies to run your business without going into debt, ensuring you don’t owe money if it fails.
Move at the Speed of Cash
The healthiest businesses have money coming in at least as fast as it’s going out. This is also known as being profitable. In general, your business should be able to pay for this month’s expenses with the sales you made this month. If your revenue is greater than your expenses, you won’t need debt to make up the difference.
Be Scrappy
To move at the speed of cash, sometimes you need to, as I call it, get scrappy. If you’re avoiding debt, you’ll need to get creative to keep your expenses low until you’re generating plenty of revenue.
One of my favorite examples of this is new restaurants who use an existing commercial kitchen during that kitchen’s off hours. Another good example is selling your product in another store before you have your own brick-and-mortar location. The store owner may be willing to come to an arrangement that works for both of you, such as a percentage of your sales for the opportunity to sell at their location.
Budget and Save
No one wants to hear about making a budget and saving! It’s true that budgeting isn’t glamorous, but it’s the secret to business success.
Before your next month begins, write down how much you think you’ll make in sales and all the expenses you have to pay. Right off the top, decide how much you’ll save. Pay your expenses out of the remaining amount. This way you’ll have savings built up, so if you fall short one month you can cover your expenses outright.
Refusing to take on debt for a small business may go against mainstream business advice. But, with almost half of all new businesses failing in the first five years, maybe all mainstream business practices aren’t the best idea.
At Kane Accounting, we focus on helping businesses become profitable and manage their finances successfully. Need more tips on how to have a surviving, and even thriving business? Download our free guide, 7 Financial First Steps to Starting a Business, to get started right!