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 recognises the true import of taking a commercial risk.
Often, collecting the 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 in order 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. 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 may be so emotionally involved with the idea of the business that he may refuse to acknowledge the danger signals.
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 it. Some entrepreneurs sidestep this proviso 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 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.
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.
It can be a challenge when any investor contributes to the business start-up funds in one year and then expects a significant return on investment by the next. The business usually needs more time to grow and become profitable.
Provision is made for the failure and death of businesses that fail. However, when an entrepreneur is unreasonably or emotionally attached to a business idea, he may tend to hold on to it longer than is rational. When rationality is lost, all is lost; it is no longer a business undertaking but more likely a debt generating mechanism.
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 anyone 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 adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.
