Small Business Debt – How the American Dream Can Become a Nightmare for Small Business Owners

Owning and operating a small business is, for many, the American Dream.  Unfortunately, the dream has become a nightmare of inescapable debt for many those who have retained us to represent them because they did not understand the “spill-over” consequences of small business debt.

The situation has been made worse for many small business debtors because they have delayed consulting with an experienced attorney until long-after their debt problems arose.  As a result, their options become extremely limited.  Small business bankruptcy proceedings in Chapter 7 and Chapter 11 may be an option – as are New Jersey state court proceedings such as an Assignment for Benefit of Creditors.  In addition, the owners of the small business must frequently also seek personal bankruptcy protection through Chapter 7, Chapter 11, or Chapter 13, to address the “spill-over” debt from the business.

A recent article on the potential perils of debt and small business highlights the need for small business owners to consider consulting professionals as they open and operate their businesses.   See the article here.

All businesses, whether small, medium or large, all carry degrees of risk which should be considered.  While there is no guarantee that any business will wholly protect the individual, there are some questions that small business owners should ask before incurring the debt:

  1. Is my business the type of business that needs credit to operate?   Businesses where revenue streams are inconsistent but costs are not and others where opportunities for revenue require up-front expenditures are particularly likely to need to access credit.
  2. Do I have access to accounting and legal professionals who can provide information and advice on the financial and legal impact of the agreements I may have to enter to obtain credit for my business?   One of the most underutilized services that experienced CPAs and lawyers can provide clients are simply advice and information.   Experienced professionals can guide you whether to sign an agreement with a creditor who offers credit but requires repayment through deductions from your credit card processor.
  3. When the business cannot pay all of its obligations, do I understand the potential risks and impact of failing to pay any particular obligation?  For example, if the business falls delinquent in payment of New Jersey Sales Tax obligations and instead pays high-interest business loans or personal credit card obligations, what will this likely mean in the future?
  4. Is the business ready to re-evaluate its plans when the “known unknowns” come?   Even – and possibly, especially – the most experienced business owners know that they cannot anticipate every event.   The ability to re-evaluate plans based on real-life circumstances is essential to avoid continuing down a path of higher risk and failing to see alternatives when they may be available.

In a world where hedge-funds are too often considered “small businesses”, there are few avenues for true small business owners to access reasonable credit which may be necessary to let their businesses start, grow, or operate.  The ever-shrinking access to small business means that small business owners themselves are personally financing their business through high-interest rate credit.   Television, radio and the internet are full of “too-good-to-be-true” sales pitches for “small business” credit.   The one thing that is for sure is that these are often neither good nor true.

In sum, if you are a small business owner experiencing debt problems, at the very least, you should promptly consult with an attorney who is an expert in the area of small business debt to discuss the legal rights and remedies that may benefit you.