How to Avoid Business Debt and Bankruptcy

How to Avoid Business Debt and Bankruptcy

Accumulating too much business debt can be crippling to a business and can lead to bankruptcy and financial ruin. Even though many businesses take on a healthy amount of business debt to grow, expand, or buy inventory, often times the debt turns into more than the business can manage and the business falls into financial trouble or bankruptcy.

Business debt can manifest itself and affect a business in a variety of ways. Preparing cash-flow projections and analyzing your income vs. expenses data can really help you understand and manage your finances. The best way to avoid debt is by not having any surprises. Know your businesses financial situation inside and out.

Follow These 5 Tips for Avoiding Business Debt

1. Avoid Debt Early.  Yes, to establish a successful business it is hard to avoid bank loans and taking on business debt, but the longer you can avoid it the better for your business. Understandably, you may have to take out a loan to start your business but make sure it is a loan you can manage and one that isn’t going to handcuff you financially moving forward. Minimize expenses; know exactly what you need to spend money on and how your business will be able to make money starting off.

Perhaps at first you can run your business out of your home or garage. Avoid hiring employees until they are absolutely necessary. Once your business is seasoned, running smoothly and ready for expansion consider appealing to investors before you look for another loan or turn to acquiring debt. Staying in the green is the easiest way to avoid falling into the red.

2. Manage Growth Debt. If a business is bringing in more income than their expenses and debt payments combined they can continue to succeed while paying off their debts. If debt payments are overwhelming and leaving little financial wiggle room any business is sure to struggle. A business that is struggling to make payments is destined for failure. Before you start taking on debt make sure you know exactly how much income you are generating and how much your expenses cost you per month. By knowing exactly how much debt you can manage to take on you can avoid financial problems.

3. Understand Your Taxes. Debt can manifest itself in many ways, not simply by maintaining a healthy amount of debt that unexpectedly pours over.  Unpaid or unexpected taxes can also lead to debt problems. While individuals are only required to file taxes once a year, businesses file taxes quarterly. Keeping your financial records in order will help prevent surprises come tax time.

The easiest was tax debt becomes an issue is by underestimating what you owe the IRS. Being a good business owner or an expert in your field doesn’t necessarily mean that you are a good books keeper. Make sure you know all tax laws relating to your businesses. Different industries have specific tax laws. States have different tax laws as well. For example, Texas and Florida have no income tax, while Oregon is one of only five states not to have a sales tax.

If you struggle to file your taxes properly, hire an accountant to prepare your taxes and maybe you’ll be receiving an unexpected bonus check from the IRS come tax time.

Make sure you are charging enough for your goods or services. Make sure you calculate tax into your products. If you aren’t charging enough then you will struggle to stay afloat financially.

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4. Manage Expenses. Pay off your expenses first. One easy way to avoid financial trouble is to pay off all your expenses as soon as you get paid. Pay off your creditors, credit cards, and bills before you start making purchases. If necessary, open separate accounts for your expenses to keep the money separate.

5. Unpaid Wages. One key to a successful and stable business is establishing regular clients or customers. Many times to appease or establish report with repeat customers businesses, especially bars or restaurants, allow these customers to maintain an open tab. On the hand, occasionally a one-time customer will stick you with a bounced check. In all instances unpaid wages can be slowly killing your business. Especially if you are starting to struggle to pay your bills it is time to call these bills in. If you have former customers that are refusing to pay don’t hesitate to hire a collection agency to recover your missing income. Make sure that any debt collection agency you hire is well respected and follows fair debt collection practices. Not only do their actions reflect on your business but you can be help legally liable for their actions.

The easiest way for avoiding business debt and bankruptcy is by thoroughly understanding your businesses financial situation. If you know your monthly income and expenses you can avoid taking on more debt than your business can afford.