What happens when a business fails?
I recently came across an interesting Facebook post that talks about a problem that might be more common than you think. A person was looking for an attorney and asking for advice on commercial leases. She and her husband owned a business, but the business failed. However, they were still under the lease contract for their space. The landlord is now threatening to sue them for unpaid rent.
This story illustrates a truth that a lot of small business owners don’t want to acknowledge or just plain don’t know. When a business fails, any contracts, leases, or loans taken out in the business’s name must still be paid back or honored. These contracts don’t go away just because there is no business generating income to pay them. Depending on how the contract is structured, the business owners could be personally liable for the remaining balance. This results in a double whammy whereby you have no business providing you with a job, no income from the job, and then potentially no savings because you probably used them to help prop the business up until it failed.
While debt is a popular way to fund a small business, this unhappy reality is often ignored when someone is excited about starting a business. Everyone thinks they have the keys to an in-demand product or service or the “next big thing.” But until your business idea is proven, you are taking on a huge risk that may result in you being personally in debt for many years after your business closes. Just imagine being at retirement age and still paying back a loan from a failed business in your twenties! That doesn’t sound very fun to me.
So what can we do to avoid that? Here are three ways you can run your business differently and avoid owing money if your business fails:
Move at the speed of cash
The healthiest businesses move at the speed of cash. In general, your business should be able to pay expenses for this month with sales made this month. This is called being profitable and occurs when your revenue is greater than your expenses.
Be scrappy
To move at the speed of cash, you need to, as I call it, get scrappy and think outside the proverbial box. One of my favorite examples of this is new restaurants using an existing commercial kitchen during that kitchen’s off hours. Another example is asking a store owner if you can sell your items in a corner of their store and giving them a percentage of all your sales for the opportunity. If you get creative and brainstorm some ideas, you can come up with an arrangement that works for both you and an existing business owner.
Budget and save
I know. I saved the most boring one for last, didn’t I? Doing a monthly budget and saving money in your business won’t get you noticed on social media. It won’t excite your friends and family. Probably no one will praise you for it. And yet…it’s the secret sauce to business success. Before your next month begins, write down how much sales you think you’ll have and all the expenses you have to pay. Then, decide how much to save right off the top. Pay your expenses out of the remaining amount. This will build up your business’s savings so you can pay cash for expenses if your sales fall short one month.
Refusing to take on small business debt will put you out of step with mainstream business advice. However, since almost half of new businesses fail within their first five years, maybe being part of the mainstream isn’t that good of an idea.
Kane Accounting is all about being profitable and going against the grain. If you’d like more tips and advice on how to have your business survive (and even thrive!), sign up for my monthly newsletter.