LOUISE FAIRSAVE – Business disaster
Operating a business can be so exciting and motivating. Yet, there are downsides to be considered. One may lose one’s investment. Even worse is the possibility of being saddled with overwhelming debt.
Looking down some of these dark alleys is not meant to be a deterrent to would-be entrepreneurs. Rather, this look recognizes the true import of taking a commercial risk.
Often, collecting legitimate debt of the business is more than a full-time job. Furthermore, it is an essential job to the life of any business. Your service or product may be the best on the market. Your invoicing and statement system may be flawless. Your debtors may make the best of excuses to stall payments.
Yet, unless there is a relatively efficient system in place to get the cash payments into the business, the business will eventually go broke.
Unless, he is receiving payment from his customers, an entrepreneur will soon find that he is in mountains of debt to his staff, and to his suppliers, and from non-payment of statutory debts. What makes it worse is that the longer it takes to collect an outstanding debt from a customer, the more likely that that debt will become fully uncollectable.
Research has shown that many new entrepreneurs start their business undertakings with too little cash in hand to withstand the initial traumas that most new businesses face. Then, too, the entrepreneur is so emotionally involve with the idea of the business that he may refuse to acknowledge the danger signals, plummeting more often than not into a debt-ridden situation.
The way in which the business is set up can also lead to the overpowering debt of the business encroaching on the investor’s personal life. The best way to limit the personal liability of the investor(s) in any business is to incorporate the business.
Some entrepreneurs sidestep this proviso either in their haste to get their offering to the market; sometimes as a means of saving start-up capital; and sometimes due to lack of understanding of the implications.
For most businesses, the investor needs also to protect the business and himself from product, public and similar liabilities. Insurance coverage is generally readily available at reasonable rate. Insurance protection should also be sought so that the poor health or death of key personnel would not unduly affect the operation of the business. If such insurance is lacking or insufficient, the business investor could end up being saddled with debt if the undesired contingency does occur.
In considering the financing of a business, an entrepreneur often looks to family and friends for support and encouragement. Often in these situations, talk is cheap. There will always be the hangers-on who will eagerly try to get in on a business idea that sounds good. However, these potential co-investors should be carefully tested.
Business undertaking is a brave endeavour. However, it can be a source of deep pain for many an entrepreneur. The greater the debt the business causes, the greater the pain can be. Some pitfalls can be avoided by careful and astute consideration, and by seeking the counsel of business experts.
Unfortunately, other pitfalls are virtually unavoidable, almost like the luck of the draw. Just remember that everyone who ends up saddled with debt, no matter what the origin, is not necessarily a bad person. It may just be the way it has turned out.
Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek special counsel about their specific circumstances.