Bankruptcy is becoming almost a commonplace word these days. It seems the stigma of being a bankrupt person is diminishing and if you are a creditor, once a person goes bankrupt, pretty much don’t expect to get even five cents on the dollar.
This article is about:
- How to avoid bankruptcy in the first place
- How to protect your assets – in case you find yourself going down that path
- And how to avoid losing out on your payment before your customer goes bankrupt.
Yes, lots to be covered and I’m covering from various angles and perspectives. I am not a qualified accountant or solicitor; this is just my viewpoint as a business coach and someone who has been helping Aussie businesses for over 30 years (and having owned my own businesses for over 15 years). I strongly recommend you consult a tax or legal professional to cover yourself correctly or address any concerns you may have.
How to Avoid Bankruptcy
This comes back to smart business practices. You should:
- Be structured correctly (I’ll talk more about this later).
- Research the business before you even start in it – do your due diligence. Whether you are starting out something brand new, or buying a business or franchise, learn everything you can. Do your market research. Is the industry already saturated with this type of business? Is there even a demand for the product or service you have in mind?
- Get the figures working right. Too often new business owners, who often have little money and lots of spare time when they start up, figure they will save a dollar and do their own bookkeeping. Unless you are a bookkeeper (or accountant) then chances are you won’t be doing it well or correctly (generally speaking of course). If you get a bookkeeper in, be sure to review the financial reports every month. If you don’t understand the reports or items which are in them – ask! If your bookkeeper won’t tell you, ask your accountant. If your accountant won’t help you, I suggest it’s time to get a new team behind you.
- Have a plan, particularly around your marketing. Do you know who your ideal client is? I ask this often of new coaching clients and some new clients are a little lost when I do ask. If you cannot clearly define who you are looking for, how can you target them? Are you tracking where your leads are coming from? Do you know what is working or not? Are all your eggs in one basket when it comes to your lead generation tactics?
- Learn everything you can – or surround yourself with those who will guide you. Most people who go into business are good at what they do – maybe they are great at doctoring, lawyering, electrical services, plastering, manufacturing, fixing computers or repairing cars. However, often they are not great at business and have little skill, training or expertise in this area. Again, I am generalising; there are always exceptions. If you don’t know heaps about business, then I recommend you read as much as you can, listen to audios, attend seminars, watch webinars or even consider an experienced business coach. Knowledge is the next best thing to experience in my opinion.
- Don’t be emotional about business. Until you are a seasoned business owner, you often take things personally. Someone doesn’t accept your quote, you feel they are rejecting you. A client doesn’t pay your bill, you feel it’s personal. A supplier rings up to get paid, you take it as an insult. Business is just that – business. Don’t make reactive decisions based on emotion. If things are not going well in your business, then be wise enough to seek advice and consider whether it’s time to call it quits. Often business owners in financial distress will bury their head in the sand, or spend money to keep up appearances, throw more money into ineffective marketing rather than approaching the situation in a cool and logical manner. If you are having problems, talk confidentially to your business advisor, coach or accountant. However, your bank manager (if you have finance, loans or mortgages) might not be the best person to share your woes with.
How to protect your assets:
No one should go into business planning to fail. It’s a little like having a prenuptial agreement prior to getting married; it feels like you are planning on getting divorced. However, the reality is that (like divorce) a certain percentage of businesses will fail. That is a statistical fact! So, here are some thoughts:
- Seek legal advice when you set up. Whilst a sole trader is the cheapest and simplest form of business structure, it is also the one which offers the least asset protection.
- If you are setting up a company, make it a single director company and have the director be the person who doesn’t own all the assets. So for a married couple, the assets may say be in the wife’s name and the husband is the Director.
- Avoid offering personal guarantees as a company Director, and if you must, then keep a copy of every one of these you sign. Naturally, sign nothing until you have read AND fully understood the document. Some personal guarantees on credit applications actually say that if you don’t pay the debt, the supplier can put a lien over your assets, such as your personal home!
- Avoid related party guarantees or loans. So in this scenario, you might take money out of your company. If you take it as a loan, there is a Division 7A loan situation, and should you go bankrupt, the liquidator can force you to pay back the loan. Had you taken the money out as wages, the situation may be different.
- Don’t put all your eggs in one basket. Avoid tax groups and separate personal assets from business assets.
- Use the PPSR register to register any money you have loaned your company; so that you are a preferred creditor should the worse occur.
- If you are struggling, lodge your BAS or IAS or super statement, even if you cannot pay. If you don’t lodge within 3 months then you may receive a Directors Penalty Notice and if you do then absolutely don’t ignore this. Lodging is somewhat your “get out of jail card” but again, talk to your qualified tax agent or accountant for the correct advice.
- With your banks – know your lending rules and what will happen if you default. Again, don’t put all your eggs in one basket. If your personal and business and investment banking is all with one bank, if one struggles, all are in jeopardy. Talk to an independent finance broker and have some separation; these brokers work for you, not the bank.
How to avoid losing money:
Now from the other side of the coin, if you are providing services and don’t want to get caught out losing a chunk of money, especially with a customer going bankrupt:
- See your solicitor about contracts, terms & conditions and director guarantees and insist on these with all accounts.
- Consider reference checking your prospective client; why did they leave their last supplier; see if you can talk to that business owner. Larger companies ask for 3-5 trade references, and yet smaller businesses rarely do this. I have heard of people who will use a string of suppliers; such as printers – use and burn and move onto the next one.
- Be on top of your invoicing and don’t delay; do it frequently and promptly.
- Be especially on top of debt collecting. Keep your receipts up to date and chase promptly; I cannot stress this enough. If things are tough for your customer, don’t let them ‘forget’ to pay you. Keep notes and if promises are not made, keep chasing.
- Be diligent. If a client avoids your phone calls, pays you in instalments, doesn’t pay you, takes ages to pay you, then these are all signs of possible financial distress. It may be they are just busy but watch these signs. When a business doesn’t pay its tax, super or BAS, there are concerns.
- Don’t be bullied. Often in certain industries, the principal contractor will say to a subcontractor that they have to keep going in order for the contractor to finish the job and get paid, then they will get paid. Be tough; if they want you to do more work, they need to pay you first. No payment, work should then freeze. Once a business declares bankruptcy, you can pretty much ‘kiss’ that money goodbye.
In a perfect world, bankruptcy would not exist. We would provide a great service and we would be paid for it and paid promptly. Unfortunately, it’s not a perfect world. People lie, people avoid payment (sometimes purely because they can), people over-extend themselves, struggle in their business and get into strife and then it becomes their suppliers’ problem. Be a savvy business owner, be on top of your business, the money side of your business, and when it comes to professional services such as setting up your business structure, having contracts documented, getting great advice then be wise and use the professionals who know what they are doing.