As both a bankruptcy attorney and business lawyer, I see both the successes and failures of small businesses. Many new entrepreneurs cannot resist the urge to “make it big.”
I had a client who started a limousine company. He had been a driver for many years and really did know the ins and outs of the business. He even managed to set up business affiliations before he even started his own company (catering establishments, florists, event planners). However, he refused to test the waters with only one limousine lease. Instead, he immediately entered into leases for four stretch limousines and obtained a line of credit from his bank for $100,000. For one year his business was, on the surface, spectacularly successful. He paid his lease expenses every month. He paid his office expenses and drivers every month. Most importantly, he took home an extremely large salary for 12 months straight. Although he was extremely busy, extremely busy often means high expenses as well as revenue. By the end of the first year, my client realized that he spent his entire $100,000 line of credit propping up his lease payments, expenses and his own large salary. Yes, he was earning revenue, but his profit was so small that he had unknowingly been supplementing his profit with the bank line of credit.
The reason we shop at closeout stores is because companies have excess inventory that they cannot sell. Many chain stores face bankruptcy because they open up too many stores across the country. One accountant I know had to start his business from scratch after focusing too much on obtaining new business and neglecting his current clients. Eventually, he had many clients, but none were happy with his services and stopped using his office.
As I have said before, a new business is like a child. You try to nurture it and watch it grow and you place all your hopes and dreams in it. Yet, I always advise my clients to start small. I tell them not to get carried away with opening up a “corporation” when all they need is a sole proprietorship. I tell them to try to obtain a bank line of credit for as little money as possible because a line of credit follows the same laws of physics – gas and money will expand into any available area they can.
Most importantly, I advise my clients to borrow as little as possible from family and friends to start their new business. If the business succeeds, they can always borrow more to expand a successful business. If the business fails, then they will be in some sort of position to pay back their benefactors. More importantly, their investors will realize that this new entrepreneur is a responsible entrepreneur, and is not taking unreasonable or poor business risks with other people’s money. Probably some of these benefactors will loan money in the future for the next business endeavor.
As always, please feel free to contact me for a free consultation regarding your specific financial circumstances.
For more Bankruptcy facts and articles, please see my website at www.allenkolber.com.
I have been practicing Bankruptcy law, Business law and Litigation for over 25 years.
The Law Offices of Allen A. Kolber, Esq. is a full-service law firm that provides quality representation in the following areas:
- Bankruptcy Law and Litigation
- Foreclosure Defense
- Loan Modifications/Short Sales
- Debtor/Creditor Law
- Business and Corporate Law and Litigation