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Small Business Failure – Plan Ahead
By Michael Taylor
Businesses succeed, businesses fail.
A company worth $16 Billion in January 2008 like Bear Stearns can disappear in March 2008 for 1.5% of that amount. So there is not necessarily shame in business failure.
For the small business owner, however, some planning should go into the “what ifs” of business failure.
At Cedarcrest we often work with companies that did not work out, and the common denominator is excessive debt.
As a frequent creditor in these situations, I can’t advocate not paying your debts. But, if you have to choose between who to pay, I would recommend paying your banker over your suppliers.
The simple reason is that your suppliers will likely do more business with you in the future, but your banker will cut you off and ensure, through credit reporting, that no other bank will treat you well in the future. Once a bank is burned, it has the ability, unlike most of your suppliers, of sharing that information with every other mainstream lender in the country.
But wait, it gets worse: If you have borrowed money from a bank, the bank typically made you sign - in fine print - a personal guaranty of the debt. That means that if your business goes under, the bank can still hold you personally liable for the debt. That may eventually mean personal collections, a lien on your home, or wage garnishment.
Few suppliers, by contrast, will try to collect money from you after your business is closed. You are not likely to be contractually personally liable for your accounts payable to suppliers.
Finally, we see too many small business owners who, in a last-gasp effort to keep their business solvent, borrow to the maximum on their bank lines of credit and credit cards. The thought is to raise as much fast cash as possible, and hope it works out. All I can say is, that is rarely a good idea. Blind hope is not a strategy. And that unpaid bank debt can be painful.
Comments (0)March 18, 2008 9:00 AM
