Undertaking a new business or making an investment in an existing one can be exciting and motivating. Yet, there are downsides to consider. There is the possibility that 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 importance of taking commercial risks.
Many new entrants to business undertakings are surprised and dismayed to find out that collecting legitimate debt is more than a full-time job.
Furthermore, it is an essential job to the life of the 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, suppliers and from non-payment of statutory debts.
Many new entrepreneurs start their business undertakings with too little cash in hand to withstand the initial traumas that most new businesses face.
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, as a means of saving start-up capital, or due to lack of understanding of the implications.
Without limited liability protection, should the business be sued or in any other way incur a disproportionately large liability or debt, the entrepreneur becomes personally liable. All of his life and family savings may be wiped out. This is not an unknown tragedy.
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 rates. Insurance protection should also be sought so that the poor health or death of key personnel would not unduly affect the operations of the business. If such insurance is lacking or insufficient, the business investor could end up being saddled with debtor failure of the business if the undesired contingency does occur.
In considering financing the 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.
There are three key tests: their willingness to put their money where their mouths are; their understanding of undertaking a long-term commercial risk; and their expectation of getting short-term gains or favours from the business. It is also important to consider how a co-investor might react when the chips are down. Failure of any one of these tests identifies an unworthy associate.
It feels important to have a business of your own or to be involved as an investor in an established business. Once you have fully considered the risks of the particular undertaking and you still feel comfortable enough to proceed, may fortune be in your favour.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
