Every day business owners walk through our doors seeking advice on how to help their small businesses survive financially. As an entrepreneur, you may have been initially advised to structure your financial affairs as an incorporated or limited entity to avoid undue personal liability. Unfortunately some decisions entrepreneurs commonly make when facing financial difficulties tend to increase your personal liability – meaning the separation between your corporate and personal dealings has been reduced (or eliminated altogether), essentially lifting the proverbial ‘Corporate Veil’. We’ve outlined five common mistakes business owners should avoid when faced with financial difficulty:
Procrastinating. Waiting too long to assess your options often results in making irrational and reactive decisions that can have serious consequences on your personal finances. Other options may also become impossible once too much time has passed, or the situation becomes pressing. In order to properly consider all options available to business owners, it is imperative to be proactive and seek assistance at the onset of any financial difficulties.
Not Planning in Full. Making long-term financial plans without preparing a cash-flow projection, or completing any financial analysis is something akin to setting off on a long (and costly) road-trip without a map or provisions. Help avoid further speed bumps by careful planning! It’s also a good idea to seek legal advice before making major business decisions to be sure you have all the knowledge you need to make the right choices for your company.
Borrowing More. Even if it’s possible to obtain more credit, be cautious before doing so. Applying for more credit before fully assessing your business can easily result in credit being over-extended, unmanageable payment obligations and unmet financial deadlines. If it’s already a struggle to pay the debts owing then adding more creditors is unlikely to be the solution.
Injecting Personal Resources. While a business may initially require a personal investment of funds, failing to draw a salary from your business, accumulating personal debt to support a failing business, or signing personal guarantees without legal advice should all be avoided. Investing family or personal funds or adding directors (particularly family or friends) as part of an effort to save the business can also have undesirable results.
Delaying Payments to Canada Revenue Agency. Although it may be tempting to defer payments to the government for things like GST or source deduction remittances, this can have serious consequences. Furthermore, the directors of a limited company are actually personally liable for some debts with Canada Revenue Agency (CRA), so while it may work for the company, it’s risky for you – CRA is a very powerful creditor.
If you think your business is in trouble, avoid taking yourself down with a ship that may be sinking. Seek advice from regulated, competent professionals who can provide you with legal and financial advice before making your next move.
For more information on how a licensed trustee can assist with your personal and business debts please contact us to arrange a free, confidential consultation.