Small Business Debt Solutions
If you have accumulated debt due to the expenses of running a small business, the options available to you for debt relief will largely depend on the type of ownership your business falls under.
"Business debt” vs. debt of a corporation
The first question to ask yourself is, have you incorporated your business? If you have NOT incorporated your business, then your business is a sole proprietorship or partnership. In this case, your debt is considered to be personal debt which was likely borrowed under your own name, even if it was used primarily for your business.
If your debt was taken out under your own name, due to the business not being incorporated, then this means that you are personally liable for paying this debt. Therefore you can be held legally responsible if the debt is not paid, which puts your personal and business assets at risk if a creditor decides to go after them.
Some debt relief options available for personal debt include but are not limited to: taking out a consolidation loan, using the equity in your home, doing a Debt Management Program and filing for consumer proposal or bankruptcy. The DebtAnswers Solution Finder can help you figure out which of these solutions is ideal for handling your debt.
Debt borrowed under the name of an incorporated business
If your business is incorporated, then you need to determine whether credit was taken out under your own name or under the name of the corporation. Just as above, if it was taken out under your name, and NOT the business’ then it is considered to be personal debt. The debt relief options listed above would apply to this type of debt.
However, if any of your debt was borrowed under the name of your incorporated business, and was NOT personally guaranteed by yourself or someone else, you would need to find a debt solution that allows business debt to be included in it.
The advantage of having your business incorporated when dealing with debt is that you generally will NOT be held personally responsible if you are unable to pay back any debt that was borrowed under the name of the business. This means that unless otherwise stated in the agreement, a creditor cannot come after your personal assets if you are unable to meet your debt obligations. However, it is possible that some creditors may have required a personal guarantee before lending you credit. If you are unsure about whether or not you are personally responsible for your corporation’s debt, it is best to review your creditor agreements with an accountant or aLicensed Insolvency Trustee.
Things to consider before proceeding with debt relief
Before tackling your debt load, it is important to take some time to review and understand your business’ recent financial statements, such as the income statement and balance sheet, even if they are created by your accountant. These reports will allow you to decide if you should continue operating your business as is, make minor or significant changes (such as moving to new location), or shut down the business altogether. The way you choose to proceed will determine your viable options for resolving the existing debt, and help to minimize the accumulation of future debt.
While it is normal for a business to suffer a loss or break-even in the first two to three years, the revenue of your business should eventually exceed its expenses, as start-up costs decrease and your customer base grows. After a few years, a solid business should be able to report a net income at the end of reporting periods, as opposed to a net loss. Keep in mind that while your aspirations early on may simply be to generate a profit, this alone if not enough for a long-term goal. Even in the early years, the net income earned by your business should be increasing (or net loss should be decreasing) with each passing year. Ideally, the net income or salary generated for yourself by the business after a few years should be high enough to at least cover your personal living expenses and/or justify the amount of time you are spending on it.
If you are trying to pay off business debts that were incurred early on, and your business is now earning a profit, then simple budgeting techniques combined with restructuring your debts might be the ideal solution. Restructuring your debt could include taking out a consolidation loan or calling your creditors directly and asking to negotiate lower interest rates and more feasible repayment terms.
Home equity options
If you are confident that your business is earning enough income to cover monthly debt payments, and you have enough equity in your home, you may even consider taking out a second mortgage or refinancing your home to consolidate your debt load and reduce the monthly payments and interest rates. However, keep in mind that by transferring your corporation’s debts to your home equity, you are now making it personal, secured debt, which means that you could be at risk of losing your home if you are unable to pay it. Therefore, home equity debt relief options should only be considered if you are able to make the payments. A licensed mortgage broker
can help you explore these options further.Insolvency options
A Division I proposal involves paying back only a portion of your corporation’s debts, based on monthly payments agreed upon by you and the creditors. This option allows your business to stay in operation and keep its assets. The repayment term will usually span over five years; however, it may be longer.
If you are ready to dissolve your corporation, and selling it is not a possible solution for paying off its debts, then filing for bankruptcy will allow you to shut down your business and eliminate the debts.
Both a Division I proposal and bankruptcy are very complex legal processes, and eligibility for either depends on a number of different factors including your corporation’s income and assets. ALicensed Insolvency Trustee will be able to properly assess if either one of these solutions is right for you, or make any other suggestions during a free appointment.