Many Canadians are self-employed, running their own small business. In many cases they started the business using their credit cards or other personal resources to fund start up costs and initial expenses. It is not uncommon for the business to start slowly, whichcan can lead to debt trouble. Approximately 10% of personal insolvencies in Canada are for individuals who owe money due to business-related debts. The average self-employed debtor who was in financial trouble owed almost $90,000 in unsecured debts including credit card debt and unpaid taxes.
So, what can a small business do to deal with debt trouble?
Can You Make Your Small Business Work?
First, and most importantly, you must decide if your business is viable. Does it have the potential to turn a profit in the future?
This is a very difficult question to answer, and you have to be honest with yourself when assessing your business’s future prospects, but it is a critical question to answer. If you are in debt because you have used that debt to fund losses and those losses are likely to continue, you may be better off closing the business until you can develop a better strategy. Some soul searching will be in order.
Watch Out For Tax Debts
When assessing business viability, don’t forget about taxes. It is very common for a small business owner to conserve cash by not paying taxes in the early years, and then you are faced with significant tax debts. Canada Revenue Agency will be patient, but only up to a point.
Prioritize, prioritize, prioritize
Another key point about debt management for small businesses is to prioritize your debts. You need to deal with the most urgent debts first. Here are some examples:
- If you don’t work out payment arrangements with Revenue Canada, they have the power to freeze your bank account, which can put you out of business.
- If you don’t pay your landlord you can’t operate.
- If you don’t pay your key suppliers, you are out of business.
Make a list of your debts, and prioritize them in order of urgency, and deal with the most urgent debts first.
Consider Getting Professional Help
Finally, if your business is viable and you are able to service your monthly expenses (like rent, payroll and utilities), but you have a lot of accumulated debt from the past, you need to develop a repayment plan to save your business for the long-term.
You could attempt to work out deals directly with your creditors. Some of them may be willing to give you a break, or give you extended payment terms.
If that’s not possible, another debt relief solution may be necessary, such as a consumer proposal (if the debts are in your name personally), or a Division 1 proposal (for corporate debts, or over $250,000 in debts). These are advanced procedures, so you should consult an expert, such as a Licensed Insolvency Trustee, for advice.
Operating a small business is challenging, so be sure to keep a close eye on the numbers, and avoid debt where possible. If you have debt, deal with it as quickly as possible.