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When you go into business you’re bound to have some customers or even other businesses fail to pay their invoices on time. It might be a matter of forgetfulness or financial hardship preventing them from paying. 

Either way, it can severely impact your daily operations, cash flow, and take up valuable time chasing down late payments. In this article, we will explore the different methods of debt collection for small businesses and a few alternatives to hiring a collections agency.

How Do Small Businesses Collect Debt?

Small businesses collect debt in many ways. It can range from a friendly reminder to hiring legal representation, plus a few things in between. 

Overall, the way debt is collected is based on how long the overdue debt has been there and what type of customer you’re dealing with. Small business debt collection practices include: 

• Reminder emails/ letters
• Phone calls
• Demand letters
• Negotiating bad debts
• Hiring a debt collection agency
• Filing with small claims court
• Filing a lawsuit

Does this client usually pay late or do they try to avoid paying altogether? Perhaps a firm reminder or demand letter will work best. If that doesn’t do the trick, you may have to send their debt to a debt collection agency. 

For a customer who’s typically on time, you’ll need a lighter touch. They may have run into financial issues that affected their ability to keep up with payments. A friendly reminder or phone call is the best option here. 

When Should One Hire a Debt Collection Agency?

As a general practice, most business owners send business debt to collection agencies once it reaches 90 to 120 days past due. 

However, the time frame isn’t the only factor to pay attention to. When you’re looking to collect on a business debt, you should look out for any one of these situations: 

• A customer making unfounded claims about the product or services they received from your business. 
• A debtor completely denies that they owe any outstanding debt without proof of payment. 
• A customer who agreed to a payment plan for their overdue accounts but hasn’t made any of their new payments. 
• New clients with no payment history who don’t respond to your initial attempt at debt collection. 
• Small businesses or individuals who have a history of defaulting on debts. 

You’ll want to keep a copy of each demand letter sent. Each one should be professional, firm, and direct about any legal action or reporting to a debt collection agency.

How Collection Agencies Work

On average, debt collection agencies charge 20% to 50% of the debt they recover. But since they only get paid when they successfully collect a debt, it incentivizes them to use legal tactics at their disposal to get your money. Plus, getting something back is better than nothing.

When you hire a debt collection service, they’ll need to get all the information available about each debtor you have an unpaid invoice with. This includes information like: 

• Customer name, any nicknames, and maiden names
• Addresses, phone numbers, and emails
• Purchase details, transaction dates, amounts, and any contracts 
• What you’ve done in your debt collection process so far 

Working with a good debt collection agency can also protect you from getting into any trouble with consumer debt collection laws. 

Reputable collection specialists abide by the Fair Debt Collection Practices Act (FDCPA), which prohibits small business owners, debt collectors, and their employees from using harassment or unfair tactics when collecting on a past due account. 

These laws don’t apply to B2B debt collections. If you’re a small business owner who needs B2B collections, there are specialized commercial debt collection agencies. 

Steps To Take Before Hiring A Debt Collection Agency

Earlier we mentioned sending friendly reminder emails. This works for customers who are genuinely forgetful, unorganized with their payments or have run into financial difficulty. A polite reminder email or letter brings your unpaid invoice to the forefront without burning any bridges. 

If reminders, phone calls, and letters aren’t working, then it’s time to change tactics. You might offer them the chance to repay their debt on a payment plan or negotiate the debt down to something they can handle. 

If they agree to a payment plan, the remaining payments must be made on time. The alternative is to send the account to collections.  

How to Hire a Good Agency

• They work with the types of customers you work with; commercial collections or consumer collections. 
• They’re familiar with your industry and the rules that govern it. 
• They’re a good representation of your company. Although you want to recover your small business debt, you don’t want to ruin your reputation in the process. The debt collector you choose should be professional and courteous with your customers. 
• Make sure they’re licensed, bonded, and insured. 
• Consider the reviews they’ve received through the Better Business Bureau.

How Much Does it Cost to Hire an Agency?

Most other business debt collectors charge a contingency fee of 25% to 50% depending on the age of the accounts and how many there are. You typically won’t find pricing on their website though. Many times they’ll have you speak to an agent to determine the cost. 

As with any other service, you’ll want to focus on the quality behind it, not just the price. Going with the cheapest option could mean sacrificing customer service or return rates.

Alternatives to Hiring a Debt Collection Agency

Collecting the Debt Yourself

Lendio’s free accounting software for small business is a great option for saving time on sending those email reminders. Sign up for free and see how they can help you improve your accounts receivable.

Selling the Debt

You’ll likely be required to sell at a large discount, but something is better than nothing. 

Going to Small Claims Court

With substantial proof that you provided goods or services and didn’t receive payment, the judge might grant a judgment in your favor,  requiring the client to pay you. This can come with plenty of court fees though. 

Hiring an Attorney

All in all, understanding how to collect debts is important for small business owners. It makes a difference in your ability to do business. While there are some actions you can take on your own, sometimes it helps to call in the professionals. 

Hiring a collection agency, selling your debt, or going to court are heavy hitters in getting your outstanding accounts paid.

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

As a small business owner, it’s easy to get caught up in day-to-day operations and neglect things like revenue forecasting. That can cause problems though, especially as your overhead goes up and you need to scale at a certain rate to stay profitable.

Fortunately, once you’ve made a few forecasts and established your systems, regularly projecting your company’s revenue becomes a lot more achievable. Here’s what you need to know about the steps involved to get started.

What is Revenue Forecasting?

Revenue forecasting refers to using historical data and educated assumptions about your business, industry, and the economy to estimate your company’s future gross sales.

In other words, it involves the combination of quantitative and qualitative information to create models of how much your company is likely to earn. 

You can then use the models to plan by tweaking inputs that reflect decisions, outcomes, and external variables.

Revenue is a high-level metric, but it has significant implications, such as:

• You need it to set realistic business budgets
• It’s largely responsible for your company’s general profitability
• It can quickly express the scale of your business or market share to a third party
• The way it trends over time represents your company’s growth or lack thereof

Because revenue impacts many aspects of your business, forecasting it is highly beneficial. Your projections can help you make more intelligent business decisions, win over prospective investors, and set appropriate long-term goals.

For example, say you’re debating whether or not it makes sense to have your sales manager expand the sales team in the coming months to keep up with an anticipated spike in demand.

With a sophisticated revenue forecasting model, you could project the impact hiring salespeople would have on your company’s earning power. Comparing it to the expense you’d incur to hire them would tell you whether they would be healthy for your cash flow.

How to Forecast Revenue

You’ll need to do a lot of preparation before you can use any revenue forecasting methods. Let’s look at the most important steps to take.

Build Accurate Financial Statements

Before you can start trying to predict the future, you need to have an accurate picture of your past. In financial management, that means building a reliable set of financial statements, including a balance sheet and an income statement.

Almost every sales forecasting method relies on historical company data to some degree. Without concrete numbers to rely on, you’re making guesses with little basis in reality.

If your company is too young to have sufficient data, it'll be harder to create an accurate forecast. You may be able to use numbers from similar companies and tweak them, but your projected revenue will be inherently less reliable.

Document the Context Behind the Numbers

Your company’s historical data tells an important story, but it’s ultimately an incomplete one. You'll also need some context to supplement your quantitative forecasting.

Take the time to document your business plans, the lessons you learn from mistakes, and the reasons behind your decisions. They can help you decipher your revenue numbers and factor any improvements you make into your future sales projections.

It’s also beneficial to perform regular variance analysis and investigate the differences between your expected and actual numbers. Once again, the things you learn can help refine your future forecasting.

For example, say it’s the end of 2025, and you want to forecast your revenue for 2026. Your business is seasonal, so you use forecasting methods that base each month’s revenue on numbers from the same month in the previous year. 

When you estimate your March 2026 revenue, you see that you had a slight drop off in sales last March. Without any context, you might assume there’s some seasonal reason for this, which would skew your projections downward.

However, upon checking your notes, you see it was because your sales leader and best sales rep left the company that month. Since that isn’t a recurring revenue issue, you can adjust your forecast to reflect better March numbers than you saw last year.

Pick a Spreadsheet or Software

Once you have the information you need to start forecasting your revenues, you have to decide whether you want to use a Microsoft Excel spreadsheet or financial forecasting software to do so.

Spreadsheets are the traditional choice and give you complete control over the forecasting process. They let you build your forecasts from the ground up, and you may develop greater insight into all of the factors affecting your sales.

However, building your revenue forecasts from scratch takes significant time and effort, and your models are much more susceptible to human error. If you transpose a number, you can throw off all your numbers and spend hours searching for the problem.

Meanwhile, software streamlines the forecasting process by linking directly to your company’s data. It may also help you manipulate the data more intuitively, but you always give up some degree of control.

Choose Your Forecasting Methods

With all your forecasting information and tools prepped, you have what you need to start the revenue forecasting process. However, you’ll have to choose between many different approaches, and each has its own strengths and weaknesses.

When selecting your favorites, consider which variables they depend on and your current revenue growth pattern. For example, some methods are better for seasonal businesses, while others make more sense for a company scaling at a steady rate.

3 Revenue Forecasting Methods

Here are some popular, easy-to-understand revenue forecasting methods. As you review them, keep in mind that you may need more advanced analytics to get meaningful insights for your business in practice.

For example, you may have to use multiple forecasting methods in conjunction, project each revenue stream individually, or make modifications for external economic factors.

1. Straight-Line

The straight-line method is the most straightforward way to forecast, though that’s not related to the name. Its simplicity can make it one of the less accurate approaches, but it also lets you estimate your revenues with little time and effort.

The straight-line method is best when:

• A rough estimate of your projected revenues will suffice
• You know you won’t take the time to run a more thorough revenue forecast
• Your business has had a steady growth rate for years and you expect it to continue

To forecast future revenue using the straight-line method, just multiply the latest year’s revenues by your company’s historical growth rate.

For example, imagine that the 2022 calendar year is coming to an end, and you want to project your revenues over the next year. In 2021 and 2022, your gross revenues were $500,000 and $525,000, respectively. That equals a 5% growth rate year over year.

To get your 2023 numbers, you’d multiply $525,000 by 1.05, which equals $551,250. If you wanted to forecast further into the future, you’d continue to multiply each year’s annual revenue by 1.05.

2. Weighted Moving Average

The weighted moving average method of forecasting revenue is similar to the straight-line method, but it’s more granular. As a result, your forecast accuracy will often be better, especially over short time horizons.

It makes the most sense when:

• Your business isn’t seasonal
• You have less historical sales data available
• You’re not trying to forecast very far into the future

To forecast revenues using the weighted moving average method, you take a weighted average of trailing data points to predict the next in the sequence. Typically, you’ll place greater weight on more recent data points.

For example, say you have the following gross revenue amounts over the previous four months:

• January: $6,400
• February: $6,800
• March: $7,250
• April: $7,000

To create a revenue projection for May, you decide to use the weighted moving average method. You give 50% weight to April, 25% to March, 15% to February, and 10% to January.

Your formula would look like the following: 

($6,400 x 10%) + ($6,800 x 15%) + ($7,250 x 25%) + ($7,000 x 50%) = $6,972.50

To create a sales forecast for your June revenues using the weighted moving average method, you’d repeat the process by using the months of February through May.

3. Simple Linear Regression

Straight-line and weighted moving average methods involve the manipulation of revenue data alone. Linear regression takes a different approach, instead using the relationship between revenues and an independent variable to make predictions.

As a result, linear regression makes the most sense for your business when you have something you believe is a clear driver of revenues.

For example, say you’re unsure whether it’s worth paying for direct mail marketing. You decide to use linear regression to forecast your sales and get the answer.

You have the following data from the previous year:

Last Year’s Data

Using the average correlation between the two variables, you can estimate that mailing 83.25 letters to client leads generates an average revenue of $7,545. It costs you $500 to send 83.25 letters to client leads early in your sales pipeline.

Say you spend the next year using email marketing instead, then repeat the linear regression with the new data.

If you find that investing $500 in email marketing each month generates higher sales activity and more than $7,545 in revenue per month, you’d know it’s the better marketing tool.

The best method for revenue forecasting is the one that applies most to your business and situation. If one of the methods above seems relevant, just get started! You can always correct course later. 

One downside to being a W-2 employee is that you don’t have access to many tax write-offs. However, if you’re a 1099 contractor, the Internal Revenue Service (IRS) lets you deduct all ordinary and necessary business expenses on your tax return.

That language sounds a bit stiff, but it basically means that you can deduct the expenses someone in your line of business would reasonably need to pay. If you’re unsure what those might be, here are some great ideas to get you started.

Top 1099 tax write-offs

1. Advertising expenses

2. Auto expenses

3. Business insurance premiums

4. Contributions to retirement plans

5. Health insurance premiums

6. Home office expenses

7. Interest on debts

8. Meals

9. Phone and internet bills

10. Qualified business income deduction

11. Self employment taxes

1. Advertising expenses

As a small business owner, you’ll need to find a way to generate interest in your product or services. Unless you have a vast network of pre-existing clients or customers, that means you’ll probably have to advertise your company somehow.

Fortunately, you can deduct those expenses, even if they take a variety of different forms. For example, you might write off the cost of your ads on social media platforms, direct mail campaigns, and business website.

2. Auto expenses

If you drive your car as part of your business, you might be able to deduct some of the expenses you incur for the vehicle. That typically includes things like gas, maintenance, registration fees, and auto insurance premiums.

That said, you can only deduct the portion of your auto expenses that corresponds with your business use. For example, if you have a car you use for business trips 25% of the time and personal trips 75% of the time, you can only deduct 25% of your car expenses.

Alternatively, you can use a standard mileage rate issued by the IRS to calculate your deduction, which involves multiplying your miles driven for business purposes by $0.56 in 2021 and $0.585 in 2022.

If you start with the standard method, you can switch to the actual expense method whenever you like. However, if you decide to use the actual expense method, you have to stand by that choice until you retire the car.

Note that driving to your primary place of work doesn’t count as business use of your car. However, if you typically work out of a home office and take a trip to a client site, that trip would count as business use.

3. Business insurance premiums

As a 1099 contractor, it’s often a good idea to purchase business insurance, though the type can vary depending on your trade. Fortunately, your premiums are tax-deductible, as long as it makes sense that you would need the policy.

For example, you’ll probably need general liability insurance if you work in construction. It helps cover the costs of a lawsuit if you ever accidentally damage your client's property and is often required by state regulation.

4. Contributions to retirement plans

As a 1099 contractor, you don’t benefit from employer-sponsored retirement plans, but that doesn’t mean you don’t have access to any retirement accounts. In fact, you have some great options that employees don’t.

For example, the Solo 401(k) is a fantastic retirement account for independent contractors with no employees. You can contribute the following amounts per year:

• Employee portion: $19,500 for 2021 and $20,500 in 2022. Those over 50 years old can also make a $6,500 catch-up contribution.
• Employer portion: 25% of your net self-employment income up to $38,500 in 2021 and $40,500 in 2022.

Contributing to retirement plans reduces your gross income for the current tax year directly. In addition, the dividends and capital gains you earn within the accounts are tax-deferred, which means you don’t pay tax on them until you withdraw your funds.

Because of the multiple tax advantages of retirement plans, contributing to them is one of the best deductions available to 1099 contractors. In any case, the funds will come back to you someday, and you can’t have too much money in retirement.

5. Health insurance premiums

In 2021, the average health insurance premium for single coverage was $7,739, which works out to about $644 per month. That’s a massive expense, and if you’re a 1099 contractor, you have to pay for it all without the help of an employer.

Fortunately, you can typically deduct the cost of your health insurance premiums, along with whatever you pay for dental insurance. If you have a spouse or a dependent, you can write off their premiums too.

However, there is one significant caveat. To take a business deduction for health insurance premiums, you can’t be eligible for coverage through a spouse’s employer.

6. Home office expenses 

If you run your business out of an office in your personal residence, you may be able to write off some of your housing expenses. That typically includes your rent, mortgage interest, property taxes, utilities, and maintenance.

To be eligible for the deduction, your home office needs to meet two criteria:

• Primary place of work: In simple terms, you have to do most of your business from your home office. If you spend 51% or more of your time working in another location, you don’t meet this requirement.
• Exclusive use: This rule stops you from taking the deduction if your home office doubles as personal space. For example, you can’t claim that your kitchen counter is a home office.

If you pass both tests, you can write off the housing expenses that correspond with the business use of your home. For example, if your home office is 100 square feet and you live in a 1,000 square feet home, you can write off 10% of your actual costs.

Alternatively, if you’d prefer not to track all your home expenses, you can use the simplified method, which involves multiplying the square footage of your home office by $5.

It’s generally best to calculate your deduction using both options to determine which will save you the most money.

7. Interest on debts

As a small business owner, you’ll likely take out a credit account at some point. Fortunately, you can write off the interest that accrues on all of your business debts, whether they’re installment or revolving accounts.

For example, say you’re a freelance photographer and use a credit card to pay for your day-to-day business expenses. If you ever carry a balance over from one month to the next, you can write off whatever interest you accrue as a result.

That's another reason why it’s best to keep your personal and business transactions on separate accounts. If you use the same credit account to pay for both, it can be hard to determine what portion of your interest is tax-deductible.

8. Meals

It might not seem like a meal could be an ordinary or necessary business expense, but it can be in certain situations. However, the rules for deducting them are pretty specific, and the IRS pays close attention since people may be tempted to cheat here.

Generally speaking, a meal must involve the discussion of business matters with a business contact to qualify for the deduction. For example, that might include:

• Lunch with an existing client where you discuss ongoing issues
• Dinner with a prospective client during which you attempt to close a deal
• A meal with a vendor where you negotiate payment terms

If a meal is deductible, you have two options for calculating the size of the write-off. You can deduct 50% of the actual cost of the meal, as long as it’s not an extravagant amount, or you can use a flat allowance set by the General Services Administration.

Notably, in the 2021 and 2022 tax years, the IRS has temporarily lifted the 50% limit for meals that come from restaurants to help the industry recover from the effects of COVID-19.

9. Phone and internet bills

As a self-employed worker, you can take a tax deduction for whatever percentage of your phone and internet usage is for business purposes.

If you rent an office space with its own internet connection and pay for a second phone line just for your business communications, you can deduct the entire cost of both services.

However, if you have a home office or use your personal cell phone number for work, you can only deduct the business portion of the related expenses. Unfortunately, it can be particularly difficult to calculate that split for your phone and internet costs.

10. Qualified business income deduction

The qualified business income (QBI) deduction can significantly reduce your tax bill as a 1099 contractor. In simple terms, it lets you write off 20% of your business earnings, though that doesn’t include things like capital gains or interest on company investments.

To be eligible for the write-off, you must have pass-through income, which primarily excludes C-Corporations. In addition, there’s a maximum income restriction, and if you exceed it, the size of your deduction depends on the type of business you run.

As you can probably tell from that description, calculating the QBI deduction can be pretty laborious. There are a lot of nuanced rules to navigate, and it’s not a good idea to try and tackle them without the help of a tax expert.

For more details, you can read the IRS publication Instructions for IRS Form 8995.

11. Self-employment taxes

The self-employment tax deduction is one of the best ways to reduce independent contractor taxes because your eligibility doesn’t have anything to do with your line of work. As long as you’re self-employed, you can probably claim it to some degree.

The self-employment tax is a 15.3% tax comprised of two parts: a 12.4% Social Security tax and a 2.9% Medicare tax. It applies to 92.35% of your net earnings. Employees get to share that cost with their employers, with each party paying 7.65%.

However, self-employed taxpayers don’t have that luxury. The self-employment tax deduction lets you write off the employer portion for income tax purposes, easing the additional tax burden.

For example, say you report $50,000 of net earnings as a sole proprietor. You’d have to pay $7,065 in self-employment taxes. However, you could reduce your taxable income for state and federal income tax purposes by half that, which is $3,825.

If you’re like any normal small business owner, you’re short on time and you’re probably thinking “What is bookkeeping and why do I need to do it?” 

Bookkeeping is a way for you to track and manage your business finances and is one of the many responsibilities that come with being a small business owner. You need to know what’s happening with your business cash flow and finances. It’s a major factor in your success. 

Here, we’ll cover some quality bookkeeping tips you can use to simplify your accounting process and make your life easier.

1. Keep Personal And Business Finances Separate

Keeping your personal and business finances separate is important for a number of reasons. As a small business owner, it’s essential for you to know what’s happening with your business finances. It’s one of the basic metrics for determining if your business is successful.

It’s much harder to know where you stand when you constantly have to decipher your transactions and guess whether it was a personal purchase or a business expense.

This also becomes a problem if you’re using business funds for personal expenses or are spending more cash than you have coming in. But you only see that clearly when there’s a separation between your business and personal funds. 

It doesn’t just apply to your business bank account. Your business should have its own separate business account and business credit card to handle financial transactions. This avoids commingling business and personal funds. 

Keeping things separate helps avoid violating any tax laws that apply to your business taxes. It also keeps you out of hot water by limiting your personal liability in legal situations involving your business. This is by far one of the most important small business bookkeeping tips.Now that you’ve separated your accounts, it’s time to track all of your expenses. Business lunches, printer ink, travel expenses—everything. There are a ton of small business tax deductions you can capitalize on, and every penny counts.

2. Keep Your Receipts

When you make a quick run to the store for business supplies, it’s second nature to ball up your receipt and move on with your day. But if you plan on including that supply run as a tax deduction, then you’ll need to hold on to your receipts. 

The IRS actually requires receipts for all business tax deductions. This doesn’t mean you have to keep a shoebox full of faded receipts though. 

Just snap a picture, verify the info, and categorize the expense. That makes it simple to see where the money is going and even integrates those expenses into your financial statements. Let’s just say your accountant is going to be thrilled with you.

3. Keep Detailed Records

The process of bookkeeping is difficult enough without having the appropriate records to reconcile the books. By keeping well-organized receipts, invoices, and other expenses, you’re making life easier on yourself. 

Your records don’t have to be complicated to be effective. If you’re fond of keeping paper records, keep a secured file cabinet with separate folders for bank statements, payroll, invoices, receivables, receipts, and other important financial information. 

You have the option to make your small business paper-free with accounting software that allows you to scan in your documentation or upload images to manage and organize your expenses in a few clicks. 

To get the most out of the expense side of your accounting software, you’ll want to look for features that allow the software to “read” the scanned information. 

Paired with AI, this helps you reduce the time it takes to enter data from your records and minimize errors. It doesn’t get much simpler than scanning or snapping a photo and reviewing for accuracy. 

Without the receipts to record what expenses your business paid throughout the year, you might have trouble claiming certain deductions at tax time. This might also result in extra time and costs associated with your accountant or bookkeeper.

4. Automate Everything That You Can

There are already enough tasks that take you away from your business. With automation, you can streamline your small business bookkeeping tasklist and get back to doing what your business needs. The right accounting software is a great first step in this direction.

With Lendio’s online accounting software, you get hours of time back by automating tasks like:

• Recurring invoices
• Tracking expenses through linked bank accounts
• Syncing invoices with bookkeeping
• Updating payment statuses

It saves you the manual entry of endless data into a spreadsheet. And there’s no more doing the sales tax and discount calculations by hand. The more bookkeeping tasks you automate, the more time you have for the other aspects of your small business.

If you’re ready to save time and automate your bookkeeping system, check out Lendio’s risk-free plans and pricing.  

5. Keep Track of Mileage or Car Expenses

Do you travel a lot for your business? Keeping track of car mileage and expenses used for business purposes could add up in tax deductions or reimbursements. It’s important to keep impeccable records to take advantage of the deduction for 58.5 cents per mile in 2022.

Each business trip must include the number of miles, the purpose, and the date. If you travel frequently, that can be difficult to manage without the help of technology. There are apps that allow you to track and log your business mileage by linking with your phone’s GPS. 

Remember that your business shouldn’t pay for your personal vehicle expenses. That’s still part of keeping your personal finances separate from your business.

6. Set Aside Money for Taxes

Each year, business owners get hit with tax obligations they weren’t prepared for. At a minimum, you should be saving at least 30% of your income in preparation for your annual or quarterly taxes. Not saving money for tax preparation can result in fines and penalties. 

Nobody wants that. 

The best thing you can do is automate a portion of your income to be deposited into a business savings account. This keeps you from accidentally spending the money you’ve been setting aside while also staying prepared for taxes year-round. 

It’s easy to forget the tax deadlines for businesses when you have so much else to do. It might be helpful to set an automatic reminder for when the deadline rolls around each year.

7. Set Aside Time to Review The Books

Even if you’re not the one doing the bookkeeping and payroll, it’s important for you to block out time to review the accounting records and financial statements with your professional bookkeeper. It keeps you up to speed with how the business is performing and growing. 

And if you’re doing it yourself, it’s especially important to stay on top of your small business accounting. Small business owners often find it challenging to manage cash flow for their company. 

Reviewing some of the financial statements, accounting reports, and accounts receivable data helps you uncover where the money is being held up. It’s best to do this weekly or monthly depending on what works for your business.

Bookkeeping for a small business is time-consuming and complex, especially if that’s not your strong suit. 

If you don’t have the money to hire an accountant or bookkeeper yet, online accounting software might be the best option for you to get your accounting in order and save time on bookkeeping. 

Once you have that down, you can make the business decisions needed to continue making profits, serving your community, and delivering on your brand promise.

8. Keep Track of Invoices

Keeping track of invoices is essential to understanding how cash flows into your business. It allows you to analyze trends and establish payment terms that work for you. 

Lendio’s software makes it easy for you to create custom invoices that look professional and provides a clear view of what’s paid, unpaid, and past due. So you know which clients are current and which ones need a reminder email. 

In many cases, you can also integrate your invoices with bookkeeping software to produce financial records and statements that make managing your bookkeeping process smoother. If you’re still accepting cash transactions, there’s a way to track that with Lendio’s software too. 

If you’ve been delivering paper invoices, Lendio’s software gives you the chance to go paper-free and optimize your cash flow with a variety of payment options. So you don’t have to accept cash payments unless you want to.

9. Consider Hiring a Bookkeeper

Hiring a good bookkeeping or accounting service is an investment that saves you time and outsources a painstaking task to someone who specializes in it. Most bookkeeping services are relatively affordable and handle everything from accounting to payroll.

Right around tax time, you’ll be grateful you decided to hire a bookkeeping service. They’ll save you plenty of money and time spent shuffling through receipts. 

Overall, having a solid bookkeeping system is important to keeping your business profitable, efficient, and running smoothly. By integrating the small business bookkeeping tips we’ve covered, you don’t have to be stressed out by the tediousness of tracking finances. 

Instead, you can use bookkeeping software, mileage tracker apps, and invoicing software like Lendio’s software to help you stay on top of everything. If all else fails, you could always hire an accountant to help you keep it all together. 

Disclaimer: This article is not intended as legal or financial advice. Consult your financial and legal professionals for professional advice tailored to your personal circumstances.

10. Adopt Cloud Bookkeeping Software

Ditch the spreadsheets and ledgers and get cloud bookkeeping software. Tech can do practically all of the tedious bookkeeping for you. Okay, not everything, but a bookkeeping platform can automate your invoicing, expense tracking, income categorization, and financial reports. That adds up to a lot of saved time.

Software doesn’t replace the need for professional accounting guidance, but it does simplify the minutia of running a business. It’ll help you get your finances in order and keep them in order. Plus, by using a cloud-based solution, you’ll always have real-time financial data on your business’s performance—no need to wait until end-of-week or end-of-month reconciliations.

Make sure your bookkeeping tool also has high-quality document management features. The right tool will streamline the process of managing financial documents like invoices, daily expenses, payables, receivables, and receipts. The software should also allow you to easily share your files with your accountant—no copy/paste or screenshots necessary. Less time bookkeeping means more time focusing on growing your business.

11. Create Cash Flow Forecasts

This process is where bookkeeping turns from entries to insights. Yes, bookkeeping is a necessary evil for legal purposes, taxes, and audits, but it also informs and drives your business strategy.

With detailed financial records, you’ll be better able to forecast your cash flow. With accurate cash flow forecasts, you’ll always be prepared to make the best financial decisions for your business. These insights will help you avoid dangerous amounts of debt and leverage your existing capital to its utmost potential. Coming full circle—these informed business decisions will improve your financial health and help you qualify for financing.

12. Pay Your Taxes

Remember when we talked about separating your personal and business expenses? Yeah, tax time is when you really reap the rewards of that upfront decision.

Income tax, payroll tax, unemployment tax, excise tax, sales tax, property tax…that’s a lot of taxes. Don’t let the fees creep up on you come tax season.

If you’ve been consistent and organized with your bookkeeping, tax time will be a breeze. If you’re using a solution like Sunrise, you can simply invite your accountant to access your transactions and financial reports —they’ll take care of the rest. Easy peasy.

13. Regularly Review Your Financial Records

Financial reports won’t do you much good if you never use them. Make it a habit to frequently analyze your statements. Keyword: analyze. Don’t just glance at them or give them a quick read—dive into the details. These are the same reports lenders will be looking at to decide if you qualify for financing. You should be looking for the same red and green flags they’re trying to discover.

To some degree, you should check your financial records every day. At the end of each day, make sure the money in the bank matches the receipts. By monitoring your transactions daily, you’ll be able to catch errors, fraud, and unexpected fees before it’s too late.

While it’s important to track day-to-day transactions, you also need to review the big picture with month-to-month statements. The profit and loss statement, balance sheet, and cash flow statement are your most important financial reports. These telling financial documents will give you quick and deep insights into your business’s health. They’re also the first thing lenders and investors will look at when examining your business’s potential.

Make sure to block off time in advance to take care of your bookkeeping tasks. You’re likely extremely busy, and many things might seem immediately more important than tracking your day-to-day finances. Don’t slip into the procrastination trap—set aside time at the end of each day and month to reconcile your books.

The Bottom Line

Overall, having a solid bookkeeping system is important to keeping your business profitable, efficient, and running smoothly. By integrating the small business bookkeeping tips we’ve covered, you don’t have to be stressed out by the tediousness of tracking finances. 

Instead, you can use bookkeeping software, mileage tracker apps, and invoicing software like Lendio’s software to help you stay on top of everything. If all else fails, you could always hire an accountant to help you keep it all together. 

Disclaimer: This article is not intended as legal or financial advice. Consult your financial and legal professionals for professional advice tailored to your personal circumstances.

If you don’t know where you’re going, how will you get there? When you're running a small business, you need a map that keeps you on the right road to reach your goals. 

Otherwise, you're just working hard every day and hoping things will turn out for the best. The bad news is that they rarely do.

That's where financial forecasting for small businesses steps in. There's even free accounting software for small business to make the forecasting process easier for you.

What is financial forecasting? 

Forecasting uses the historical performance data of your business to predict its performance in the future. 

Financial forecasts can give you a picture of how your business will perform in the future in best-case, worst-case, and normal scenarios. These forecasts form the foundation for preparing budgets and sales schedules as part of a business plan.

A financial plan is used to construct the three basic financial statements for a business: an income statement, balance sheet, and cash flow statement. 

Sales forecast: Create a sales projection on either a monthly or quarterly basis. Also include sales projections of each product or service and the specific cost of goods sold for each one. 

You need to know which products give you the highest profit margins so you can focus your sales budgeting and marketing efforts on those items. 

Expense budgeting with fixed and variable costs: Expense budgeting includes fixed expenses such as rent and insurance premiums and the variable cost of labor and materials. 

These expenses may change as a company increases revenue, expands to new locations, or hires additional employees. 

Income statement: Forecasts for income statements can change depending on the sales product mix, costs of production, marketing costs, and different pricing strategies to meet competition.

Preparing different income statements for various conditions can give you an idea of the profitability of your business for multiple strategies.

Balance sheet: Assets and liabilities present the financial health of a small business with different strategies. For example, some strategies may require that the company carry higher inventory and support increased amounts of accounts receivable. 

Depending on the company's profit margin, the company may need to obtain short-term financing to support the buildup in current assets. Financial forecasts will show you what your company will look like in these circumstances so you can plan in advance if you need to obtain financing.

Cash flow statement forecasting: How will your decisions affect your cash flow statement and the amount of cash in your bank accounts?

A company that is experiencing rapid increases in revenues with low net profit margins may not generate enough internal cash inflows to have enough working capital to support the resulting increase in assets. 

Financial forecasts are critical to planning your cash flow forecast to make sure there’s always enough cash to pay expenses, regardless of the circumstances.

Break-even analysis: The first performance benchmark is to calculate how much sales volume is needed to cover fixed costs. 

This is the absolute minimum that must be met, otherwise, the company would be operating at a loss. Financial forecasting will show you how your break-even revenue levels will change under various strategies.

How to write a financial forecast for your business 

Step 1 - Review your historical financial performance

Are you satisfied with your sales levels? Do you need to revise your marketing strategy or increase the intensity of your sales efforts?

Are you happy with your gross profit margins? Do you need to analyze each product’s cost of production to find ways to improve efficiency or lower costs? 

It’s important to go through each one of your company's financial ratios (liquidity, asset efficiency, profit margins, and debt leverage) and identify those that need improvement. 

If you see, for example, that your current ratio is consistently less than two to one, you could use the forecast to predict the results of improving receivables collection efforts or lowering inventory levels. 

Step 2 - Create a baseline projection

For example, if sales have been increasing at a 10% rate for the past several years, you could reasonably assume that sales will go up another 10% next year. If total expenses have been rising at a 9% rate, you could safely project the same increase for the coming year.

By just making straight-line projections on historical data, you can create a baseline financial projection you can use to test the results of various strategies. 

As an illustration, suppose you want to expand your product line. You could start by modifying the baseline projection to see the effects of increased new product sales and the related costs of production on profits.

Step 3 - Take into account factors that might change the baseline

For quantitative projections, you could use something as simple as taking historical data and making straight-line forecasts into the future. 

Step 4 - Forecast different scenarios

Consider different scenarios. What happens if the economy turns down or if a new competitor appears? How will these events affect your future sales, profits, and cash flow? What actions will you need to take?

Considering different scenarios will help you prepare your business to deal with these challenges. It’s much better if you’re prepared beforehand rather than being caught off-guard and having to scramble. 

Uses of financial forecasting

You can use financial forecasting to:

Plan for the future

Suppose you want to pay down your debts. A forecast can show how much cash will be generated, where it will come from, and how quickly you can liquidate your loans. 

If the debt repayment plan is too slow, you can adjust the forecast and make the changes needed in your operations to increase the cash flow. You may need to change your product mix or find ways to cut expenses to meet the debt repayment schedule you want. 

As your company grows, you may need to add additional employees. You may find that you'll need more salespeople, warehouse personnel, or more administrative support. A forecast will identify when you’ll need the new employees and how much cost they’ll add to your payroll.

If growth requires additional capital equipment, the forecast will identify how much equipment is needed and when it will have to be in place. At the same time, you can begin to solicit price quotes and develop a plan to pay for the purchases.

Establish realistic goals

You may find that your company isn't generating enough internal cash flow to support the rapid increase in assets that come with high growth rates. 

If your business is already leveraged with debt, you might not be able to get additional financing to support the growth. In that case, you'll need to scale back your dreams to a more realistic goal. 

Show to potential investors and lenders 

Lenders want to feel comfortable that you'll be able to repay a long-term loan or manage a business line of credit. You can establish credibility as a small business owner by presenting a well-thought-out cash flow projection that shows them how you’ll be able to repay a loan. 

In addition, you could present different forecasts that show how you'll still be able to repay the loan even if things don’t go as planned.

Lenders want to believe that you're in charge of your business and know how to handle different types of business financing.

Investors want to know that they're going to get a good return on their money to justify taking the risk of making an equity investment in your company. A realistic forecast will show that the company is capable of generating a good return on equity and that the return is likely. 

What tools can help you forecast your financials?

You can even try out different “what-if” scenarios. Financial planning won’t be time-consuming or tedious with these tools.

These software apps will typically come with a set of key performance indicators (KPIs) -- such as monthly sales, gross profit margins, EBITDA, liquidity ratios, and inventory turnover -- that monitor the performance of your business. 

KPIs are like looking at the instruments on the dashboard of your car except, in this case, the indicators are measuring business performance.

Conclusion

Monitor the actual results and look for deviations from the plan to make corrections. This is like driving your car down the road and it drifts off the pavement. You then make a correction to get back on the road. It’s the same idea with your business. 

Some KPIs you can monitor weekly, and others you look at on a monthly basis. 

Resources

1. Entrepreneur: “Preparing for the Future With Better Financial Planning for Small Business”
2. SCORE: “3 Basic Financial Statements You Need to Keep Track of Your Money”
3. Inc.: “Financial Ratios”
4. Entrepreneur: “3 Reasons to Stop Creating Financial Reports Manually”
5. Forbes: “The Value of Key Performance Indicators”

I recently spoke with Jacqueline Vong, founder and president of Playology International, about managing cash flow. Over the course of the interview, she tossed out the term “slush fund” in a positive way rather than with its more nefarious connotation, which was interesting because I thought I was the only person who did that.

The term “slush fund” comes from the era of the actual pirates of the actual Caribbean. The cooks working in ship gallows would skim off the meat grease (known as the slush) because it was in high demand by candle makers and other merchants. The cooks would sell the slush in port, use their proceeds (the slush fund) to live very well away from the boat, and party their way into history as an inspiration to side hustlers everywhere.

You’ve Probably Heard the Term “Slush Fund” in a Different Context

Today, however, slush fund is usually linked to a politician or someone in power ciphering funds to keep in their back pocket for quietly taking care of unexpected inconveniences. While I’d never condone such behavior, the strategy makes good sense. Every business needs some just-in-case money.

Slush Fund = Money Put Aside for When You REALLY Need It

Here’s what we mean about a slush fund for your business: Emergency Cash, Rainy Day Money and D’oh Dough, which may be my favorite alternative. 

A slush fund isn’t “savings,” because it’s not for anything specific like retirement or planned expansion. And it’s not “petty cash” because it’s not for incidentals like catering an unexpected client lunch in your boardroom. And while you should be actively building your corporate savings and making sure to have petty cash on hand, a slush fund is its own thing and it should be respected because life’s curveballs come in fast, especially for entrepreneurs.

Dipping Into Your Slush Fund Can Be a Good Sign

Sometimes, you need the money because the fruits of your labor are paying off, and you need a little bump to put yourself over the finish line. For example:

• You networked your tail off for four months and secured a once-in-life opportunity you know you could land and would regret passing up, but it’s going to cost you $4,500 in prep and travel to put your best foot forward. You’d dip into your slush fund to nail the pitch and close the business.

• After an exhaustive search for a new sales director, you found a candidate you love and who loves you, but your competitor is offering them a $6K signing bonus. You’d raid your slush fund for $7,500 to knock your competitor out of the running.

Or It Could Be to Get Yourself Out of Trouble

You-know-what happens, and sometimes your only option is to suck it up and deal with it. In those moments, having what you need to handle it on your own (i.e., without insurance money, which will raise your premiums), could be your best option. For example: 

• You sent a large run of billboard ads to print but missed a typo that now extends your client’s generous offer for a year longer that they expected to run it, and they’re holding you accountable. You’d leverage your slush fund to cover the reprint costs.

• You thought you found the next big thing, but you were wrong and now you have debts to importers, shippers, graphic designers, and printers. You’d empty your slush fund to pay it all off and start building it again with an important lesson learned. 

How Do You Build a Slush Fund?

My thinking was (and is) that a slush fund becomes more important as a business gets bigger, has more experiences, and is exposed to more opportunity and risk. That’s why I felt okay building my slush fund slowly and methodically over time. From the beginning, I ciphered 1.5% of my monthly revenue into my slush fund. I set up my business bank account to do it automatically and I track it in my bookkeeping software. I never noticed it missing day to day, but I really noticed when I had the money to take advantage of a down commercial real estate market and significantly upgrade my office.

If you’re a new business putting aside 1.5% a month (which amounts to $1.50 for every $100 you bring in), you won’t see much of a bump quarter over quarter—and that’s okay because you probably won’t need the money anyway so keep building it.

Whether you’re new or established, there will absolutely be times when you don’t think you can afford to part with 0.0015% of your revenue, much less 1.5 percent. I’d strongly encourage you to stick with it, if for no other reason than to maintain strong habits.

BTW, there will also be times when dipping into your slush fund isn’t practical or when your slush fund balance won’t quite cut it. That’s when a business line of creditcomes in handy.

When Should You Start Building a Slush Fund?

Should you start building a slush fund now? Yes. But if you think it’s silly or a waste, know this: I thought the same thing when I opened my business. Then I started putting away the 1.5% on the strong advice of my accountant. After a while, I didn’t really notice that I was stashing some money aside—until it was there when I needed it. 

If you start now, it’ll be there for you too.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Even if you have an accountant on staff, there are still some financial documents you should be familiar with as a small business owner: income statements, balance sheets, and cash flow statements. Each gives insight to a business’s financial health, although income statements and balance sheets display different information, which is used to create a cash flow statement. Plus, they’re all important to potential lenders and investors.

Let’s start at the end: cash flow statements.

While an income statement shows how your business earned money across time, your balance sheet provides a snapshot of your company’s financial health in the present. Lenders may want to evaluate both along with the cash flow statement you create from them as part of their funding decision.

What’s a Cash Flow Statement?

A cash flow statement displays how much actual cash is moving in and out of your company’s accounts. It is built based on the information recorded on your income statement and your balance sheet, which is why it’s important to understand those financial documents, too. Lenders will see a cash flow statement as an indicator of your business’s financial status.

What’s an Income Statement?

Before you can build a cash flow statement, you’ll need an income statement. As you might expect, an income statement shows a business’s revenues. It also includes costs of goods sold (COGS) and expenses over a period of time. This document is also called a profit and loss (P&L) statement. Income statements are created on a regular basis, often quarterly and annually. The income statement shows whether the business has turned a profit or operated at a loss over a specific period of time.

“This report tells you how much money a business makes, and a lot more,” says Eric Rosenberg of Due. “A well-run bookkeeping operation includes details for where you spend and where your money comes from. For example, I can look at my P&L for a quick summary of how much I make from writing, how much I make from advertising, how much I spend on business travel, and how much I pay for computer and internet costs. Each business would have different accounts for its own income and spending categories.”

Over the long run, you can compare past income statements to your current ones to see how your business is running across its life. Lenders also value income statements because they reveal whether your business is profitable over time—and therefore whether they should continue to fund it.

Income Statement Examples

You can find income statements online for publicly traded companies, like Apple.

Imagine your company XYZ has earned $327,000 in revenue during the fiscal quarter and the COGS, meaning the direct costs related to each item sold, is $190,000—your gross profit is $137,000. Say you have $120,000 in expenses, like rent, wages, and marketing. Your operating profit for the quarter is $17,000.

What’s a Balance Sheet?

Your balance sheet, on the other hand, shows your assets, liabilities, and shareholders’ equity (which may also be called owners’ equity). The amount of your assets should always equal (or balance to) your liabilities and shareholders’ equity added together.

Examples of assets include cash in your bank account, property, and vehicles. Liabilities are debts, like loan repayments. Shareholders’ equity is calculated from the other 2 factors: it’s how much the company would be worth if all assets were sold and liabilities were paid down.

While an income statement shows how your business earned money across time, your balance sheet provides a snapshot of your company’s financial health in the present. For this reason, lenders also evaluate balance sheets as part of their funding decisions to analyze the strength of your business. And over time, comparing past balance sheets with present-day ones can also function as a diagnostic tool for your business’s success.

“Each section of the balance sheet can provide you with important financial information you can use to improve your small business,” writes Elizabeth Macauley in The Hartford. “Be sure to consider how each section intersects, interacts, and connects as well. Considering the whole picture can give you better insights to help you make the correct future financial decisions.”

Balance Sheet Examples

Publicly traded companies, like Walmart, also publish their balance sheets online.  

Say your company XYZ has $800,000 in assets and $436,000 in liabilities. The shareholders’ equity is $364,000. On this balance sheet, both the assets side and the liabilities plus shareholders’ equity side balance.

Is an Income Statement Part of a Balance Sheet?

Income statements and balance sheets are separate documents, but both are often viewed together and generated at the same time (e.g., every quarter). Each document shows different but related financial information. In a broad sense, income statements show how your company has performed in the past, while a balance sheet provides a valuation of your company in the present moment.

What Comes First, an Income Statement or Balance Sheet?

When preparing financial documents, like for a lender, your income statement should be placed before your balance sheet. Generally, a lender will be interested first in your company’s profitability, which is displayed on your income statement. The other data is still important, as it will speak to whether the company is a good investment or not.

Should an Income Statement and Balance Sheet Match?

While the information on your income statements and balance sheets will be different, it should all reflect your business’s financial situation as accurately as possible. The bottom line of your income statement and your balance sheet equation will differ because they utilize different data.

How to Track Your Financial Statements 

If you’re not already using a bookkeeping tool to keep your business’s financial records, consider adding one like Sunrise—which offers tools and services that simplify financial report generation and organization (you can also use Sunrise to invoice customers, manage expenses, and process certain transactions). Plus, Sunrise offers everything from free DIY bookkeeping tools to personal bookkeeping services. 

The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice, and all information, content, and materials contained within are for general-information purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

For small business owners, bankruptcy can feel like an obscenity to say out loud. When you read about big corporations going bankrupt in the news or hear entrepreneur friends share that their small businesses filed for bankruptcy, it sounds like they’ve reached a tragic end.

The truth is that bankruptcy doesn’t mean you’ll never work again—it doesn’t even mean that your business has to shutter for good. While the bankruptcy process for small businesses can be traumatic, expensive, and financially damaging, there are ways to mitigate the stress of bankruptcy as well as methods to protect your business and your assets during the process.

Knowing the different options available for small businesses considering bankruptcy is the first step. Before you contact a lawyer or your creditors, think about which type of bankruptcy might fit your situation best.  

What Is Bankruptcy?

Bankruptcy is a legal proceeding decided in federal court involving an individual or company that is unable to repay outstanding debts. Typically, the process begins with a filing on behalf of the debtors, although occasionally debtors can begin the process with the court. During the process, the court takes into account the debtor’s assets. Depending on the type of bankruptcy, the types of debt involved, and the business’s structure, the court may decide that the assets are used to repay debts.

It’s common knowledge among entrepreneurs that most small businesses fail: Bureau of Labor data shows that about 50% of small businesses close within 5 years of opening. However, not every business that closes files for bankruptcy. Most companies that consider bankruptcy are having issues with repaying debt.

Still, small business bankruptcies happen all the time. In the first quarter of 2021, a study found that there were 6,289 commercial bankruptcies in the United States.  

You often hear the different types of bankruptcies referred to as “chapters”—this refers to their chapter in the US Bankruptcy Code. Another recent survey of small businesses found that of respondents that filed for bankruptcy, 51% filed for Chapter 7, 22% filed for Chapter 11, and 27% filed for Chapter 13. We’ll talk more about these chapter types below.

When Should a Business File for Bankruptcy?

Instead of thinking about how successful—or not—your business is, when considering bankruptcies, think most about your debts and your ability to repay them.

“The truth is, if your business is consistently unable to keep up with your debts and expenses, it’s already bankrupt—or on a very short trajectory towards it,” explains Meredith Wood in AllBusiness. “Filing for bankruptcy protection is meant to help you get out of this untenable situation and keep many of your personal assets. You may be able to keep your business open while you pay off debt by reorganizing, consolidating, and/or negotiating terms.”

Filing for bankruptcy can lead to the closure of your business, but it can also be used to save your company by allowing you to renegotiate your debt situation. Either way, it doesn’t foreclose your ability to start another business in the future.

“While filing for bankruptcy does take recovery time, it isn’t the all-time credit-wrecker you may think,” Wood continues. “Typically, after 10 years, it is removed from your credit history, and you’ll likely be able to get financing several years before that.”

If you feel like your debt and business expenses are overwhelming your small business’s ability to continue, you should think about bankruptcy. The next step is to determine what type of bankruptcy represents the best way to move forward.  

The 3 Types of Small Business Bankruptcy

The 3 main types of bankruptcies utilized by small businesses are Chapter 7, Chapter 11, and Chapter 13. There are even more forms of bankruptcies for individuals, companies, and cities, but these 3 types are the main commercial options available to you.

The type of bankruptcy you pursue will mostly depend on how your business is structured and how you plan to move forward after filing bankruptcy.

Importantly, any bankruptcy filing places a temporary stay on your creditors and puts your repayments on hold while the court considers your situation.

Chapter 7: Liquidation

In Chapter 7 bankruptcy, a company is closed and its assets are liquidated in order to pay off its debts. In the popular imagination, this situation is likely the one most people think of when they think about bankruptcy. If you believe your small business has no viable future, Chapter 7 might be your best option. Chapter 7 might also make sense if your business doesn’t have a lot of assets to begin with.

Sole proprietorships file a personal Chapter 7, which takes into account both personal and business debts.

When Chapter 7 proceedings start, a “means test” is conducted on the applicant’s income. If the income is over a predetermined level, the application is denied. Next, the court appoints a trustee to take over the company’s assets, liquidate them, and distribute them amongst the creditors.

If it is a sole proprietorship case, a discharge is issued after the creditors are paid, meaning the business owner is no longer obliged to pay any more of the debt in question.  

Chapter 11: Reorganization

If you think your business can continue after bankruptcy, filing for Chapter 11 might represent your best choice. In this type of bankruptcy, the debtor plans to reorganize so that it can repay its debt while continuing operations. Working with a trustee and your creditors, you’ll have to devise an expansive plan that shows how you can repay your debt. Your plan must ultimately be approved by your creditors.

Chapter 11 is commonly talked about in the financial press, but it can be a hard process to navigate for small businesses.

“While Chapter 11 is designed to give distressed but viable businesses a second chance, it has a very poor track record with small and medium-sized companies,” a report from the Brookings Institute notes. “The costs of bankruptcy for small and medium-sized businesses are substantial—often 30% of the value of the business—and two-thirds are liquidated rather than reorganizing.”

There are good reasons to suspect that a Chapter 11 bankruptcy might work best for you if you don’t want to shut down. However, going this route can be expensive and lengthy—many proceedings take a year or longer to complete. It’s worth it to contact a qualified bankruptcy attorney if you want to explore Chapter 11.

Chapter 7 vs. Chapter 11

As complex as it is, you might want to research Chapter 11 if you feel like your business can continue with restructuring.

“The only reason you need to use Chapter 11 at all is to deal with recalcitrant creditors,” bankruptcy lawyer Bob Keach told the New York Times. “If creditors won’t negotiate with you, bankruptcy allows you to cram down a plan of restructuring.”

Remember, filing for Chapter 7 doesn’t mean you can never open another business, although financing might be more difficult to find at first.

Chapter 13: Reorganization for Sole Proprietors

If you’re a sole proprietor with a high income, you can file Chapter 13 bankruptcy. This allows you to keep your assets and property if you agree to a new repayment plan with your creditors. These plans usually last 3 to 5 years.

Does Filing for Bankruptcy Mean Going out of Business?

If you file for Chapter 7 bankruptcy, your business is closed and its assets are liquidated. If you file for Chapter 11, you’ll be allowed to keep your business open under a new plan with your creditors.

Will Business Bankruptcy Affect Me Personally?

A business bankruptcy could impact the business owner if your personal assets were used as collateral for your debts. Importantly, though, you will not go to jail for not paying a business loan.

“It depends on what personal guarantees you made,” Amy Haimerl writes in the New York Times. “Most small business owners put up their home or some other asset as collateral for start-up loans…If you used your house as collateral, it’s possible you would be forced to sell it as part of a Chapter 7 settlement. Under Chapter 11, you may have more luck.”

If you’re a sole proprietor and you file for Chapter 7 but fail the means test, you can file for Chapter 13. However, your repayment plan will be based on your income.

One of the big differences between personal and business bankruptcy is the means test. Individuals have to participate in a means test to determine if they are eligible for a Chapter 7 or a Chapter 13, while businesses do not have to undergo this for a Chapter 11 filing.

If your business is structured as a limited liability company (LLC) or a corporation, then your personal assets should be protected unless you used them to secure a loan.

If you file for bankruptcy as a sole proprietor, your personal credit score will lower significantly. Chapter 7 and Chapter 11 bankruptcies stay on your credit report for up to 10 years, while Chapter 13 bankruptcies stay on your credit report for up to 7 years.

If your business is an LLC or a corporation, its bankruptcy filing shouldn’t impact your personal credit score. However, if you personally guaranteed one of the company’s loans and you fail to repay, your credit score could be dinged.