Archives for February 2023

Avoiding the Debt Trap: Bad Financial Habits That Can Derail a Small Business

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Starting a business requires a substantial investment from its stakeholders. But if you don’t see quick returns on your investment, debt can accumulate, crushing your plans of a successful venture.

According to a recent survey, 34% percent of small business owners report $5,000-$15,000 in personal debt related to business, while 28% report $15,000-$30,000 in debt. While some debt is unavoidable, there are notorious debt traps that can trap new entrepreneurs.

If you’re just getting started, beware of the following:

Failure to budget.  At Magone & Company, we recommend that most business owners have two to three different budgets — an internal planned budget, an overachievement budget and a budget that considers negative outcomes. Because even if your business is generating a profit, it’s easy to lose of track of where all your funds are going.

Sloppy bookkeeping. In the early stages of a new business, it’s critical to track all expenses, sales, operating costs and taxes. You need to know where your money is going and be prepared to make changes to operations if necessary.

Not separating personal and business accounts. Comingling accounts can mean big financial trouble. Why? Because you can’t get a true snapshot of the financial health of your business. Don’t mix business with personal — especially when it comes to your finances.

Credit card rewards. In theory, a business credit card may seem like a great idea for general business expenses — like supplies, office furniture, entertaining vendors or business trips — and earning points and rewards for every dollar spent. The catch is you have to spend a lot to earn a little. If you’re carrying a balance each month, you’re also accumulating interest, which means more debt owed. If you’re going to use a business credit card to take advantage of the rewards, be sure to pay your balance in full each month.

401(k) withdrawals. Tempted to borrow from your 401(k) until you generate more revenue? Remember, this hurts your retirement savings and long-term growth potential. And if you’re under age 59 ½, you’ll also have to pay taxes on the premature distribution.

Falling for high-cost loans. Business loans can come with interest rates as low as 3% — and as high as 150%. An ethical lender will only approve a loan that’s realistic to repay, but you can get lured into a bad deal. Be sure to read the loan contract, ask about origination fees and make sure you are clear on the annual rate before committing to the debt.

 Gain control over your bottom line

Take charge of your finances now — before it’s too late. The professionals at Magone & Company can help you navigate debt traps and implement smart debt management practices. Call us today at (973) 301-2300 for a specific evaluation of your situation.

A Chapter 11 Filing Doesn’t Always Mean the End

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In a roller-coaster economy, a struggling company might decide to seek a fresh start under Chapter 11 bankruptcy proceedings — especially if its leadership believes the business could eventually become profitable through debt relief.

Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It differs from Chapter 7, which involves liquidating or selling off the assets of a business that’s closing its doors. Debts aren’t simply absolved by filing Chapter 11 — though they’re likely to be reduced or paid off over a period of years.

Instead, Chapter 11 allows the business to continue day-to-day operations, as it undergoes downsizing and liquidation. The goal of a Chapter 11 filing is to implement a more sustainable solution to pay off debts and reorganize the business so it may survive this process.

What to expect

There are five major steps involved in the Chapter 11 process:

Step 1. Once the appropriate forms are filed in court, the company is provided immediate relief — called an automatic stay — from creditors. A bankruptcy filing doesn’t always affect business operations, but it will likely influence the stock price of a public company and the borrowing costs for any business. The company continues to pay employees and provide benefits. It’s also able to keep dealing with suppliers and customers so that it may continue earning money.

Step 2. The bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they’re owed money by the company.

Step 3. The business proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the business proceeds in good faith, the period may be extended.

Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any disputed claims. And once the total value is determined, the business can establish whether its reorganization plan is viable. Sometimes, litigation over the priority or handling of creditors arises.

Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a reorganization plan and the company distributes payments according to the plan.

Restoring your rep

Even though a business can overcome a Chapter 11 filing and thrive over time, its reputation with customers, suppliers and employees may take a hit. If your company is thinking about filing Chapter 11, be sure to clearly understand what’s involved and the potential impact on critical business relationships. Be sure to consult with your attorney and CPA to help ensure bankruptcy is the right move for a better future.

Don’t already have a trusted CPA working on behalf of your organization? Magone & Company has 30 years of experience assisting organizations during financial challenges. Let’s chat.