Being an entrepreneur is like riding a sensational roller-coaster. Indeed, entrepreneurs are risk takers who assume the ups and the downs of their business venture. As an entrepreneur, you most likely enjoy taking advantage of current opportunities and creating your own luck. Being an entrepreneur is a risky endeavor – which is exactly the reason you find it so gratifying. As a successful entrepreneur, you accept the inherent risks of the business in order to take advantage of its possible rewards. You are not discouraged by failure and see it rather as a learning experience. You know that falling down and rising back up is part of your entrepreneurial journey. Therefore, you are always on the lookout for possible ways to lessen hardship and to get back on your feet.
Let’s look at 10 viable methods to reduce your liability when your business faces financial difficulties.
1. Pay Your Payroll Taxes on Time
Businesses must deduct a portion on their employees’ wages and remit it to the government as a form of payroll tax. Businesses must also pay taxes based on employees’ wages, as another form of payroll tax. Therefore, when your troubled business faces financial difficulties and you are looking for ways to improve its liquidity and to reduce its liabilities, it is strongly advised not to skip paying its payroll taxes on time as a means to preserve its cash. The consequences of late payroll tax deposits range from penalties and interest to criminal penalties for tax evasion. Don’t borrow against your payroll taxes in the hopes of obtaining a quick supply of cash.
2. Cut Unnecessary Expenses and Prepare a Short Term Cash Projection Plan
In times of hardship, you should reduce your liabilities by decreasing business expenses that do not contribute to generating money. For example, reducing travel expenses by flying coach instead of business class and by traveling during off-peak times allows you to further business development while saving money. Additionally, keep in mind that video conference call expenses are cheaper alternatives to travel expenses. Moreover, you can reduce expenses that pertain to the meals and entertainment category without suffocating business development and growth opportunities by either reducing the frequency of the events or selecting less expensive venues. It is sensible to use a template to track your daily expenses in order to control expenditures.
Creating a short term cash projection plan helps your troubled business reduce liabilities by assessing the cash available from all sources as well as the total forecasted expenditures. The estimated balance at the end of the period should be neither too large nor too negative. You could tweak the short term cash projection plan by factoring in a loan repayment if there were too much cash on hand or by further reducing expenses if the cash flow were too negative. It is prudent to use a cash flow tracker as a template to track cash flows from operations, investments and financing.
3. Disclose Your Financial Condition to the Bank When You Apply for a New Loan
You must paint an accurate picture of your business’ financial situation when you apply for a new loan. Banks generally ask to see several main documents such as the:
- Business current and projected financials;
- Profit and loss (P&L) statement; and
- Loan application history.
These documents depict the financial condition of the business and allow the bank to make a decision regarding your application for a new loan. Businesses must submit documents that are not misleading and that truly reflect their financial condition. Manipulating the numbers and distorting reality in order to obtain a loan is advised against because the law may regard the new loan as having been obtained by fraud. Nevertheless, keep in mind that it is wise to compare loan terms, costs and features before taking a new loan.
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4. Do Not Make Preferential Payments and Pay All Creditors
Preferential debt payments are pre-bankruptcy payments made to certain creditors that the trustee can get back. Indeed, the bankruptcy trustee could be entitled to receive their money back if you made an avoidable payment prior to bankruptcy, such as repaying a loan from friends and family. The bankruptcy trustee could recoup preferential payments in order to redistribute the money amongst all creditors. It is therefore advisable not to make preferential payments shortly before filing for bankruptcy and to pay all creditors. Nevertheless, keep in mind it is possible to have a document made between partners and their joint creditors with agreement not to sue.
5. Avoid Hiding Assets
Hiding assets prior to filing for bankruptcy is usually a very bad idea. Indeed, it is fraudulent to transfer assets out of your name with the intention of hiding them from creditors. Moreover, the bankruptcy trustee could repossess your non-exempt assets in order to repay the creditors. It is therefore advisable to avoid hiding assets and to diligently research the pre-bankruptcy planning options that could help you retain your assets. Nevertheless, keep in mind it is possible to transfer assets with the right legal documents.
6. Protect Your Bank Account from Bank Failures
The last thing you would want to come across when your business is in trouble is a bank failure. Indeed, having uninsured deposits in a financial institution that just went under could translate into not having immediate access to those funds and facing drastic liquidity problems. It is therefore wise to diversify your investments and to place your money in several insured financial companies, so as to avoid holding all your eggs in one basket.
Opening a bank account in an insured financial institution is wise because deposit guarantee schemes insure a certain amount of eligible deposits to depositors when the failed bank is a member of the institution list. Holding money in insured deposits at insured financial institutions reduces financial risk, which is important, especially when your business is in trouble. Let’s take a look at the schemes certain countries offer and at the benefits of opening a bank account.
The Singapore Deposit Insurance Corporation Limited (SDIC) covers individuals and other non-bank depositors with insured deposits placed with a Deposit Insurance (DI) Scheme member. A DI Scheme member can either be a bank or a finance company. The SDIC indemnifies eligible accounts up to S$50,000 in the event a member goes bankrupt.
The Swiss Financial Market Supervisory Authority (FINMA) offers depositor protection for clients at authorized banks and securities dealers. FINMA protects privileged deposits up to a maximum of CHF 100,000 per client should a member institution fail.
The Deposit Guarantee and Investor Recovery Foundation (EAS) covers the eligible deposits of its clients up to a maximum of CHF 100,000, in the event a licensed financial institution fails.
The Deposit Guarantee and Resolution of Credit and Other Institutions Scheme (DGS) insures up to €100,000 in eligible deposits, including accrued interest, per depositor, per eligible credit institution.
- United Kingdom
The Financial Services Compensation Scheme (FSCS) insures deposits made by private individuals and small businesses to authorized and protected firms. The eligible deposit compensation limit is £75,000 per person per firm. Moreover, the FSCS provides a £1 million protection limit for temporary high balances, under certain conditions.
- United States
The Federal Deposit Insurance Corporation (FDIC) protects against the loss of insured deposits in the event an insured financial institution fails. The FDIC insures the principal amount plus any interest accrued up to at least $250,000.
The Canada Deposit Insurance Corporation (CDIC) covers the eligible deposits of its clients up a maximum coverage limit of $100,000 per category, in the event a member institution fails.
General Subordination Agreement between Creditors
This Agreement is concluded between the Creditors, that have claims to the same debtor. It sets out the procedures regarding the repayment of the money owed by the Debtor to the Creditors.
7. Do Not Make Late Insurance Payments
Your insurance company could cancel your policy when your payment is late. Even if the insurance policy offered a grace period for late payments, you could still be charged with late fees and face rate hikes in the future. When you know you will be late on a payment, try contacting your insurance company and submitting an alternative date for payment. Better yet, try negotiating lower rates with your current insurance company or shop around for a new insurance company that offers more attractive rates.
8. Pay Rent on Time in Order to Avoid Eviction
It is important to pay rent on time even when your business faces financial difficulties. Do not hasten hardship by forgetting to pay rent on time and by possibly facing ejection. Even if your landlord offered you a grace period before evicting you, being late on rent could negatively affect your credit score. Indeed, late rent payments could cost you not only late fees, but could also hurt your credit score and harm your loan applications. Instead, talk to you landlord should you no longer be able to afford rent. Let them know that your business is in trouble and that you are looking for ways to reduce liabilities. It is possible to cancel or amend the lease agreement between landlord and tenant, and certain templates and legal documents can help.
9. Do Not Borrow from Your Company’s Pension Plan
It is not permissible to borrow money from your company’s pension plan even when you plan to swiftly pay it back. Indeed, you cannot use your company’s pension plan as a quick supply of cash in order to temporarily fix your company’s liquidity problems. Pension plans must be managed ethically and employers cannot expose the pension plan to the risk of losing the plan assets.
10. Think About Selling the Business
When the hardship of your troubled business is overwhelming and further reducing liabilities becomes a burden, selling the business may not be such a bad idea. There are two typical ways through which you can sell your business.
- Sell your shares
If you owned an incorporated business, you could sell your shares in the business and walk away from all of the assets and liabilities. Share sales are generally less complex than asset sales and usually offer more attractive tax implications to the seller.
- Sell your assets
An asset sale implicates selling all or most of your assets in the business as opposed to selling the shares of the business itself. Assets can include equipment, inventory, property, accounts receivable, etc.
In conclusion, entrepreneurs can reduce the liabilities of their troubled business in multiple ways and can use several templates and legal documents to help them recover from hardship. You, as an entrepreneur, have the choice amongst many options including renegotiating agreements, taking on additional loans and even selling the business. Selling your business does not necessarily equate with failure and offers the opportunity to start fresh and create a new company
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