Business Debt and Personal Liability
When serious debt is an issue, the first thing most business owners want to talk about is liability. What debt is exclusive to the business? And what, if anything, are you personally liable for? While there isn’t a straightforward answer to these questions, you should be able to determine, relatively quickly, what business debt can affect you on a personal basis.For starters, if you’re operating a sole proprietorship or act as an independent contractor, you and your business are legally considered the same thing. You owe every penny that your business can’t pay, which means creditors can come after your personal assets when all of the business assets have been seized.
In most cases, general partnerships operate the same way. However, there’s an interesting difference. Because both you and your partner(s) are 100 percent liable for business debt, creditors can take money from any of the partners. That means if all of your partners are broke, creditors can seize 100 percent of the debt from your personal assets.
The benefit of operating under a corporation or LLC is that you and your business are considered separate legal entities. Creditors can’t touch your house or personal assets. But as always, there are some exceptions.
Creditors know that a corporation or LLC’s stakeholders aren’t liable for the debt. They’ll often require business owners and partners to sign personal guarantees; these promise they’ll satisfy the debt if the business is unable to do so. If you’ve signed any personal guarantees on your business debt, you are, in fact, liable. It’s also possible that you’ve offered up your house as collateral for a loan. Unfortunately, there’s no easy way of getting around this.
6 Tips for Digging Out of Serious Debt
Digging out of business debt really isn’t all that different from pulling yourself out of personal debt. You have to find a way to spend less than you make and put the remaining money toward your debts until they’re paid off.Check Your Credit Report
The very first thing you need to do is get the lay of the land. It’s impossible to tackle any issue, including debt, if you don’t first have all the information and understand the facts.Snowball Debt Payments
Paying off debt is psychological as much as anything else. If you get aggressive with your debt, yet fail to see results, you’ll likely throw in the towel. On the other hand, if you start to gain some traction and see some debts disappear, the momentum builds. That’s why many financial experts suggest snowballing your debt payments.In order to snowball your debt payments, you start by listing off your debts from smallest to largest. (Note: This is contrary to the traditional route of ranking debts from the highest to the lowest interest rate.) With these debts ranked, you start chipping away at your debt in order.
Negotiate With Creditors
Sometimes it’s helpful to look at debt from the perspective of the creditor. If you’ve ever had a client or customer owe you money for a long period of time, then you know what it’s like. At some point, you count the debt as a loss and assume you’ll never see it. Thus, if that client were to contact you months later and offer to settle for a lower amount, you’d likely accept.Hire Your Spouse
Unless you suddenly see a massive increase in revenue, you’ll have to find a way to cut costs in order to free up money to pay off debt. You can do this in a variety of ways, but one clever strategy is to hire your spouse.
This strategy only works in certain situations, but can be enormously helpful when it does. It works like this: You find a position in your company that your spouse can fill. Instead of hiring someone like you usually would, you put your spouse in that position and pay a percentage of the going rate. If you would have paid a $45,000 salary, maybe you only pay $20,000. Sure, it has a temporary effect on your personal household income, but it frees up a couple of thousand dollars per month that can go toward paying down debt.
Chase Down Late Paying Customers
Maybe you have some late-paying customers of your own who have unpaid debts. Now’s a good time to chase them down and collect what you’re owed. Again, you might be willing to settle for 50- or 60-cent on the dollar if means collecting on a debt that you know you won’t see in full.Sell Off Assets
One proactive option is to sell off some assets to pay off your debts. Spend some time thinking about your business and its processes. Are there certain things you could do differently without impacting the quality of goods or services you provide? You might find that you can sell a piece of expensive equipment and buy a cheaper, used version without much of a drop-off. Get creative and you might discover some options here.Shift Your Mentality Regarding Debt
We live in a country where debt is praised. Whether it’s personal debt or business debt, people love spending money they don’t have. Sometimes it’s necessary—such as when you’re trying to scale a business—but much of the debt companies take on is foolish.As a business owner, entrepreneur, and individual, it’s time to shift your mentality regarding debt. It’s a myth that large purchases require debt and you need to get this concept out of your mind. Just ask Dave Ramsey, who has built an eight-figure business empire without incurring any debt. He rents until he can pay in cash, outsources to avoid debt, and buys used instead of new to save a considerable amount of money.
Debt might not be evil, but taking on too much debt will hold your business back and lead to a lot of stressful, sleepless nights. Now’s the time to get a grip on what’s happening and start clawing your way out. It might take years, but you’ll eventually experience the freedom that comes with owning a business that isn’t controlled by creditors.
