Recently in Saving a Troubled Business Category

March 31, 2011

What to do When a Client Won't Pay

The problem of clients refusing to pay their bills on time--or ever--is one that plagues all businesses. And the problem has only gotten worse with the downturn in the economy. When clients don't pay their bills--making it difficult for you to pay your own bills--what is a small business like yours to do?

One option for cash-strapped businesses has always been factoring, or selling outstanding invoices to a third-party investor. But there are downsides. Invoices are often sold for a sharp discount. And the collections process is taken over by the purchaser of the invoice, who most likely doesn't care about retaining good customer relations with your clients.

A company called The Receivables Exchange now offers a twist to the age-old process of factoring, largely remedying those downsides. According to the article "How Small Businesses Can Beat Deadbeats," by Dyan Machan in SmartMoney Magazine, The Receivables Exchange works as follows: You list your unpaid invoices on the exchange, and financial institutions bid on those invoices. The winner of the bid sends you a cash advance (usually 80% to 90% of the value of the invoice, although businesses new to the exchange may receive much less) in return for a monthly payment of one to two percent. You get an immediate infusion of cash--allowing you to pay your bills and keep your business afloat--and the bidder gets what amounts to an 18% annual return on its investment. Businesses who have listed on The Receivables Exchange say they raise more cash through the exchange than with traditional factors, and they retain control over customer contact.

Unlike traditional factoring, the risk of the invoice never getting paid stays with you, the small business owner. You still need to go through the collections process with your client. And if your client never pays up, you'd be on the hook to repay your bidder. But still, The Receivables Exchange can be an attractive option for some small businesses--particularly if they're at risk of becoming deadbeat clients themselves.

June 7, 2010

Bankruptcy for Small Business Owners

If you're considering filing for bankruptcy because your small business cannot pull itself out of debt, you're not alone. While the economy's getting better every day and many businesses are finally showing a profit again, some businesses suffered too many losses during the height of the recession to be able to pay off their past due debt. If it looks like it's time to throw in the towel, you can use Chapter 7 personal bankruptcy to wipe out your liability for your business's debts and start over. 

It used to be hard to find information on Chapter 7 personal bankruptcy that addresses the concerns of small business owners, but Nolo has published a helpful new book on the subject: Bankruptcy for Small Business Owners: How to File for Chapter 7. (Disclosure: I'm one of the book's co-authors. I'm a little late in plugging the book; it's been out since March.) 

The book can help you decide whether chapter 7 personal bankruptcy is the best solution for you by teaching you about:
  • the difference between personal and business bankruptcy
  • how to determine whether you're personal liable for your business debts
  • which if your business debts and assets will be affected by bankruptcy
  • your eligibility for bankruptcy
  • exemptions that can protect your property, and 
  • what happens to your house and car in bankruptcy.
If you're considering closing down your business and filing bankruptcy to wipe your slate clean--or even trying to keep your business open but filing bankruptcy to get out from under your past debts, it might be helpful to you. You can read the first chapter for free on Nolo's site.
August 3, 2009

Minimize Your Personal Liability for Your Debts

Here's the third big-picture strategy from my save your business list:

3. Minimize your personal liability for your business debts.

If you're business is struggling, you should know what's at stake. If you're a sole proprietor or a general partner in a partnership, it's simple: you are personally liable for all debts of your business. That means a creditor can sue you and come after your personal bank account, your house, and your personal property.

If you are a shareholder of a corporation or member of an LLC, theoretically your personal property is protected from business creditors, but there are a number of ways that you can give up this liability protection--mainly by not keeping adequate separation between you and your business. For instance, if you signed a business contract in your name rather than as a representative of the business, or if you signed a personal guarantee, you're personally liable for paying back that debt if the business doesn't. I recently posted an article on Nolo's website that gives further details on when you're personally liable for your business's debts.

If you are currently running a sole proprietorship or partnership and you believe your business is viable in the long term, quickly forming an LLC or corporation will protect your personal assets, such as your house or your car, from being taken to pay off new business debts. If you are able to pay off to pay off your old debts--the ones that you incurred while you were a sole proprietor or partner--and you convert to an LLC or corporation, you'll be protected from personal liability for most new debts. Just keep in mind that forming an LLC or corporation won't allow you to escape your personal liability for current business debts.

July 26, 2009

React Quickly to Bad News

Here's the first strategy from my save your business list. It's a fairly obvious one, but not following it has cost many a small business owner their shirt over the last six months:

1) You must react quickly to bad news.

If an economic downturn, bad industry news, or the illness of a key employee or owner threatens the viability of your company, you need to make a quick decision: Will you try to fix the problem (for example, in a downturn, you might cut costs sharply to try to stay afloat), change the direction of your business, try to sell your business, or simply close down? Failing to act quickly can bring down a business that could have otherwise have survived.

Here's an example: A friend of mine worked at a company that lost half of its service business by January 2009. But they kept hoping things would turn around and didn't want to lose any employees, so they kept a full staff until April, when they finally made some gradual layoffs. Then in May, when they started having trouble paying bills as they came due, they reduced the work week to from 40 hours to 30 hours. In June, they laid off a few more employees each week, until just a few people were left in the office. The first week of July, fearing the worst, two key employees left for new jobs, and the company imploded. Lesson to be learned: The company should have made deep cuts in January, probably laying off half of its workforce then. If it had done that, it would have had a good chance of keeping the rest of its employees busy at 40 hours per week and might have been able to hold on to its key employees. Of course, hindsight is 20/20.

July 24, 2009

New Book From Nolo: Save Your Small Business


My new book (okay, the one I co-authored with Nolo's Ralph Warner), Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down & Move On, has just arrived from the printer! To celebrate its publication, over the next ten posts I'll introduce the book's 10 core strategies to saving a troubled business.

Here they are:
1) React quickly to bad news
2) Improve your cash flow
3) Minimize your personal liability for your debts
4) Concentrate your efforts on what's really profitable
5) Innovate on a shoestring
6) Identity your customers to focus your marketing efforts on them
7) Don't waste money on ineffective marketing
8) If you have to cut payroll costs, try reduced workweeks, handle layoffs fairly, and keep your best people
9) Don't overwork long hours and drag your business down with you
10) Work with, not against, your competitors

July 19, 2009

Starting a Restaurant in a Down Economy


Many entrepreneurs and foodies dream about starting a new restaurant, sure that they can beat the odds, even though statistics say that the restaurant failure rate is among the highest of all small businesses. Think you can beat the odds, even in an economic downturn? Here are some good tips on starting a restaurant I just stumbled on, complements of Entrepreneur magazine's Sara Wilson.

For all the legal and business information you need to get your business off the ground and running, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).