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One of the biggest risks for any small business owner is the possibility of facing a lawsuit or a debt collection from creditors. If you have invested a lot of your personal assets into your business, you may lose them if your business becomes insolvent or bankrupt. Therefore, it is important to take proactive steps to protect your business from creditors before any financial problems arise. Here are some strategies that you can consider to safeguard your business assets and your investment from creditors.

a. The time to protect your business investment from creditors is before any financial problems arise.

If you fail to protect your business assets before you borrow money, incur substantial debt, or encounter significant financial problems, you may be giving your business creditors a better chance of accessing your assets and challenging any future planning you have done.

b. Understand your exposure as a principal of the business.

As a shareholder of the business, your exposure is generally limited to the amount of your investment, including your shareholdings and any shareholder loans you make to the corporation. However, various situations may arise which impose additional liability upon you.

If you have given a personal guarantee to guarantee the debts and obligations of the business, creditors may be able to sue you and attach your personal assets (by way of garnishment or seizure) to cover the amount guaranteed.

As a director or officer of the company, you may also have additional personal liability for such things as unpaid employee salaries, uncollected or unremitted sales or other taxes, unremitted payroll deductions, and breach of contract.

c. Protect your personal assets.

Prior to signing a personal guarantee, engaging in a new business opportunity or agreeing to be a director or officer of a company, you should consider the following strategies:

• If you haven’t already done so, incorporate the business as a for-profit company or an LLC to separate your personal assets from your business’ liabilities, limiting creditor access to business assets only.
• Transfer your personal assets to your spouse or some other party (at fair market value).
• Invest your money in assets which are exempt from creditors’ claims.
• Set up an asset protection trust in a foreign jurisdiction.

d. Protect the company's bottom line.

There are similar steps you can take to protect the profits of your business:

1. Establish a holding company to hold the shares in the corporation. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.
   
   A holding company is a separate legal entity that owns shares in another company, usually the operating company that runs the business. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.

2. Set up a trust. Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   A trust is a legal arrangement that allows a person or an entity (the trustee) to hold and manage assets for the benefit of another person or group of persons (the beneficiaries). Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   All creditor proofing strategies require careful consideration of taxation issues so as to avoid income attribution problems or the unexpected triggering of capital or income gains. The above opportunities and strategies represent only a sample of what ought to be considered. Each circumstance will offer its own opportunities and restrictions on planning.You should consult with a professional accountant and a lawyer before implementing any of these strategies to ensure that they are suitable for your situation and comply with the relevant laws and regulations.

3. Make a secured shareholder loan to the business secured by business-owned assets as collateral. You will then have a priority creditor claim against those assets if the business defaults.

If you operate a small business, you already fill a lot of different roles. Should Accountant / Bookkeeper be one of them? Maybe outsourcing is an option that will work for you. Here are some pros and cons to consider when deciding whether to outsource your accounting functions vs. doing them inhouse.

What is an indemnity bond?

An indemnity bond (also called a surety bond or fidelity bond) is a form of insurance purchased by one party to a contract as a means of compensating a second party to the contract, should the first party fail to deliver on its promises or perform its obligations. The bond is guaranteed by a third party (usually a bank) which agrees to pay the second party if the first party defaults.

Under what circumstances would an indemnity bond be used?

There are many scenarios in which an indemnity bond might be required by one or more of the parties to a transaction. For instance, bid bonds are commonly used in situations where projects are offered through a bidding process.

Bid bonds ensure that the successful bidder follows through on the promises set out in its bid. Payment bonds are used extensively in construction projects to guarantee that the general contractor pays all of its subtrades and suppliers, to protect the project owner against exposure to lien claims.

An indemnity bond could be used to avoid double payment by a company redeeming its shares in the event of a lost share certificate, or to indemnify a freight carrier for delivery of a shipment of goods if the bill of lading is lost.

Is an indemnity bond the same as a personal guarantee?

No - these are two different types of obligations. A guarantee (or guaranty) is a promise to pay the indebtedness of a corporation or business if it becomes unable to meet its financial obligations, up to the full amount of the debt. An indemnity is a promise to protect the indemnified party against any losses it may suffer in connection with the transaction, without limit.

Do I have to get a lawyer to prepare the bond?

No, you can purchase a bond from any financial institution or insurance company. But you should review it with your lawyer so that he/she can explain exactly what the legal implications are.

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As a small business owner, you know how important it is to have enough funds on hand to keep your business running. These available funds are known as working capital, and they are needed to run a healthy business.

Inadequate working capital levels are cited by the SBA Small Business Administration as one of the top reasons for small business failure. As such, learning about and securing proper levels for your company is crucial.

What is Working Capital?

Simply put, working capital is the difference between your current assets and current liabilities. Current assets are those that can be converted to cash within a year, while current liabilities are debts and obligations due within a year. Without enough working capital, you may not be able to pay creditors or meet your operating needs. But how do you know how much you have, and how much you need?

How to Calculate Working Capital

To determine how much working capital your business has, you can use this calculator. It calculates working capital by using four inputs – annual growth, current target ratio, total assets, and total liabilities. Annual growth refers to your expected annual growth for the next year, while the current target ratio is current assets divided by current liabilities. For most businesses, a ratio of around 2.0 is optimal.

There are a number of factors that influence how much working capital a business needs. For instance, seasonal businesses need more working capital to keep them afloat in the off-season and to meet the higher expenses that often occur during preparation for the peak season. When deciding how much working capital your business needs, consider your industry, growth rate, and fixed costs.

Working Capital Loans

So, now you know how much working capital you have, and how much you need. But where do you get it? Small businesses often need additional working capital to get through difficult periods. A working capital loan can help fill temporary funding holes and keep your business up and running. Working capital loans are designed specifically for small business owners who need short-term capital. These loans are often available through online lenders, and offer real advantages over traditional bank loans.

Working capital loans are generally easier to get approved, faster to get funded and more convenient to use, providing fast capital when you need it. Repayment periods tend to be shorter, months rather than years, as the loan is intended to get the business through a short-term cash flow problem.

Applying for a Working Capital Loan

When you apply for a working capital loan, lenders will consider several factors to determine if you qualify. Some banks will ask for your financial statements and a balance sheet, then they will check your business and personal credit scores, the length of time your company has been in business, and annual revenue.

Alternative lenders will not wholly rely on your credit reports instead they will review your actual business metrics and transactions in your accounts such as; bank, accounting software and credit card payment processors. You'll need to provide financial statements and a balance sheet.

Lenders vary in what businesses they prefer to lend to. Some will provide loans to businesses with credit scores below 500, as long as they are generating sufficient revenue or have been in business at least a year, while others require higher credit scores, greater revenue, and more years in operation.

Utilizing Working Capital

Now that you know how much working capital you have, you can think about the best way to use it to benefit your business. In addition to fixed costs, you can use working capital to build and improve your business. These monies can be used to pay for expensive equipment that often requires large upfront payments.

You can also fund your businesses expansion with new or remodeled office space, a second location, and other improvements are common. Also, you can expand your staff, hiring new staff and paying for their training. Every industry has its own best uses of working capital. Hair salons often invest in advertising campaigns while auto repair shops buy car accessories to sell and install in customer's vehicles.

Finally, working capital can provide a sense of security. With a generous cushion, you are prepared for any setback or unforeseen circumstance that may arise – which affect all small businesses. With sufficient capital on hand, you can rest easy, knowing that your business expenses can be met.

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About the Author:

Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services work well in business today. You can learn from her experiences to build your business.

Whether you have a great new startup idea or a long-running business, you’ve probably come to one inevitable fork in the road: financing.

It’s the extra capital you need to take your company to the next level, be it for funding resources, creating a new marketing budget, or securing a deal with an overseas manufacturer. Entrepreneurs in Connecticut know full well the challenges faced as its highly-competitive markets cater to some of the wealthiest income brackets in the country.

Small business owners face particularly unique challenges when it comes to financing—and trust me, I know all about these. I’m a serial entrepreneur who’s been through the wringer having started one of my companies from scratch, growing it, and eventually selling for $1,000,000.

One key financing lesson I’ve learned is that there are many options for entrepreneurs to choose from, each with their own advantages and disadvantages.

So let’s go over some of these finance choices—ranging from 401k rollovers to invoice financing and beyond—to discuss which one is right for you.

Financing Strategies for Startups

Small business startups are already enduring enough challenges—getting new customers, establishing a good reputation, and the list goes on.

Thankfully, there are a number of great ways to fund your business during its earliest stages.

SBA Bank Loans: One of the simplest and common routes to take is a bank loan, specifically through the Small Business Administration (SBA). The government has vested interests in ensuring a vibrant economy and, thus, has allocated a certain number of funds to help out startups. Just remember, you’ll still need a great credit score and significant security (like your home) to qualify.

Grants: Aside from this, there are also grants. Every year, countless private and public organizations offer grants to help innovative or helpful new technologies and services. By visiting www.grants.gov, you can browse many thousands of potential funding sources to give your startup that extra boost.

Crowdfunding: A somewhat unconventional yet burgeoning new option is crowdfunding. Thanks to the internet and websites like Indiegogo and Kickstarter, you can now receive hundreds, thousands, or even millions of dollars through the generous donations of thousands of people from around the world. Even better, since 2016, the JOBS Act loosened regulations so small businesses can promote their stocks for financing on these crowdfunding sites.

Seed Financing: Seed financing, either through startup incubators or some venture capital firms, provide another option. While firms specializing in venture capital generally do not invest in startups, there are exceptions, such as with Accel Partners. Similarly, startup incubators and accelerators are organizations that facilitate the needs of small businesses and can provide financing.

Friends and Family Investments: Sometimes, though, you can avoid the “official” routes and consider investments from family or friends. It may seem unconventional but it’s a totally viable option that could mutually benefit you and the partner. Indeed, securing funding from someone you know personally can actually boost your odds of being invested in from “official” investors, since it indicates your credibility and trustworthiness.

ROBS / 401(k): There's also ROBS, an often overlooked treasure trove in the form of your 401(k) retirement account, which you might have thought was strictly for use after 65 – but think again. I used my 401k to fund my startup business. Here's how I did it.

ROBS—Rollover for Business Startups—allows you to transfer the money from your 401(k) and use it to finance your business’ startup. In order to do this, you must follow these steps:

1. Create a C Corporation: turn your business into a C Corporation (others, such as LLCs or S-Corps, do not qualify).

2. Estabalish a 401(k) Within the Business: the company must have the capacity in place for these retirement securities.

3. Roll It Over: shift your current 401(k) into the new startup.

4. Regard Your Startup as an Asset: the rolled over 401(k) funds can be invested into assets.

5. Investment Becomes Capital: the newly-invested money into the C Corporation is now available as capital for financing.

The ROBS financing option for small businesses is a great one to consider when you need that extra lump sum of cash.

Although like all investments this approach could ultimately fail if your business fails, there are some upsides compared to traditional investment options. Specifically, the 401(k) funds are before-tax and no implications exist towards your credit history.

Financing For Established Businesses

If your company is already established, there are a number of specific financing options that could work for you.

These include invoice factoring and invoice financing (also known as accounts receivable financing). Although there are many similarities between these and their overall functions, specific differences exist that make them uniquely suited in certain scenarios.

Invoice Factoring

Invoice factoring basically allows you to sell outstanding invoices for cash. The invoices are essentially sold to a third-party entity, entering them into an exchange.

In general, you can enjoy roughly 80% of the advance immediately. Plus, you’ll no longer have to waste so much time hounding your clients for unfulfilled checks.

Invoice Financing

Invoice financing (also known as accounts receivable financing) works by selling your accounts receivable. In turn, those pending payments become cash that can be used for all types of business-related expenses.

Effectively, you are selling an asset, which is much different compared to purchasing a loan. Although some of the mechanics are similar, the key difference is that it doesn’t come with the baggage of “going into debt.”

Your customers and their reliable credit history essentially become an asset you can capitalize.

Companies like Fundbox, for example, offer invoice financing services . The process involves connecting with your business’ accounting software and then divvying up funds to you within your overall credit limit. Funds are generally transferred to you within 1 business day.

One of the key differences between invoice factoring and invoice financing is that in the latter, your company retains more control and privacy – something I know from personal experience. In contrast, the factoring route usually involves a more invasive third-party company that often contacts your clients about payments.

Other Alternatives

The internet has brought an unprecedented level of innovation and connectivity to the world. With this has come a broad new set of services, including within the realm of financing, referred to as Fintech.

Many reputable services online that offer reliable lines of credit to help fund your business needs. One of the great conveniences with these lines of credit is that they often come with exceptional terms such as to pay back loans within 6 or 12 months after drawing funds from your account. In other words, your full credit available amount remains in your account, but you are only required to pay it off after a period of time starting once the money is taken out.

Additionally, instead of paying interest on the credit, you only have to pay low monthly fees, ranging from 1% to 4%. Applications can be filled online and approvals can be done simply by connecting to your business’ accounting software, such as QuickBooks.

Aside from lines of credit, there is also working capital. As obvious a source of funding as this may seem, it is often overlooked amid the hectic day-to-day operations of a business. Working capital is based on a ratio of currents assets and current liabilities.

Within these variables exist the potential for short-term funding options that may not be immediately apparent yet could go a long way for sustaining your needs.

Conclusion

Financing is necessary for both startups and established businesses. The aforementioned options come with their own unique offerings that could be a perfect fit for your needs.

The 401(k) rollover plan is one of many startup funding options available to aspiring entrepreneurs. Alternatively, invoice financing or factoring can help find wealth within unpaid invoices. With lines of credit and working capital, you can discover even more nuanced business financing options.

As competitive as the business world can be, there are plenty of helpful financing solutions that can bolster your company when you need it most.

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About the Author:

Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services work well in business today. You can learn from her experiences to build your business.

You loaned money to an old friend. Things started off well, and he made a couple of payments. But now three months have gone by without a payment, and he's avoiding your calls. You're faced with a dilemma - he's an old friend and you don't want to ruin the friendship, but you can't afford to just write off the money you loaned him. Should you sue him?

Hiring for nonprofits is not the same as hiring staff for a profit corporation. For one thing, you'll be working with substantially less money in your personnel budget than a private company of comparable size would have available.

Declaring personal bankruptcy is a decision that should not be entered into lightly. But if your personal debt far exceeds your ability to repay, then it's an option you must consider. Before you decide to declare bankruptcy, you need to know all the facts.

You've invested a lot of time, money and resources into your business - you need to protect not only the business, but also your employees, your premises, your assets and your future. You cannot afford to leave yourself exposed to unnecessary risk. Stinting on your insurance as a means of saving money is false economy - it's a short-term saving, at the expense of future viability.

Determining the Coverage You Need

Do you know what types of insurance coverage your business actually needs? Each industry has its own unique risks and liability issues. It's important to analyze each facet of your operation to determine what could conceivably go wrong, what sorts of hazards your employees and customers may be exposed to (even minor ones), and what different types of policies are available to limit your liability and protect yourself and your business against claims and damages.

In an era when people will sue for just about any silly reason (remember the infamous McDonald's hot coffee lawsuit?), it has become increasingly important to get it right when putting together your business insurance package. You should start by obtaining risk analyses and insurance quotes from at least three insurance agents, preferably agents who have experience with your type of business and are familiar with the inherent risks. Whenever possible, you should insure with a local agent so you can arrange face-to-face discussions about your specific insurance needs - someone to whom you can become a recognizable person instead of just a policy number. Here is a list of the types of business insurance that you should consider in your Quest for Ideal Coverage.

Business Owner's Insurance

Business owner's insurance coverage is like a homeowner's policy for a business. It packages together a number of coverages and the premiums typically cost less than they would if you purchased these coverages separately. A business owner's policy usually includes:

• property insurance (buildings, equipment and inventory),
• business interruption insurance, to cover situations that may cause you to temporarily shut down operations or reduce production,
• casualty protection,
• crime insurance (theft, fraud and destruction),
• liability and product liability insurance,
• vehicle coverage for borrowed or rented / leased vehicles.

This type of insurance is more cost effective for small to mid-sized businesses, and may include much, if not most, of the coverage that your operation requires.

Property Insurance

The business owner's policy may not extend to damage outside of your premises. If you're located in a multi-occupancy building, you may be required to carry additional property insurance as a condition of your lease.

Liability Insurance

Liability insurance insures against claims for damage to property or injury to persons for which you are held to be responsible, including negligence claims, and suits filed by employees injured on the job. Liability insurance policies cover the legal costs and any damages awarded to the claimant.

Product Liability Insurance

Product liability insurance covers you in the event a product you produce causes harm to a purchaser of that product, or any third party. The purpose of product liability insurance is to protect your business against paying legal or court costs for claims arising from such an event.

Professional Liability Insurance

Professional liability (or professional indemnity) insurance protects service providers against claims for negligence, misrepresentation, violations of fair dealing and good faith, and inaccurate or incorrect professional advice. It is required by law to be carried by medical practitioners (malpractice insurance) and legal practices (errors and omissions - known as E&O - insurance).

Vehicle Insurance

If your business owns any vehicles, you are required by law to have adequate collision and liability coverage on all of your commercially used vehicles.

Workers' Compensation Insurance

Workers' compensation provides wage replacement and medical benefits for employees who are injured on the job. In return for receiving workers' compensation, the employee relinquishes the right to sue the employer for negligence. By law, employers must carry workers' compensation insurance for all employees.

How to Save Money on Your Business Insurance

As mentioned earlier, a Business Owner's Policy will bundle a lot of essential coverages into one package, at a lower premium. But remember that you get what you pay for. The cheapest policy may not provide you with the best protection. There are other ways to keep your insurance costs down without compromising the safety of your business and your employees.

1. Increase your deductibles. Increasing the amount of your deductible under each policy will decrease the amount of your premiums. While it will also mean that you will pay more money out-of-pocket in the event that something goes wrong in the future, it will positively affect your cash flow in the here-and-now.

2. Take advantage of group rates through business organizations and professional associations. Many business organizations offer special discounted insurance rates to their members. Calculate the cost of paying the association dues plus what you'll pay with the special insurance rate, and compare that to what you're paying now.

3. Use the risk analyses as a guide to reducing your liability. Remember those risk analyses you obtained from the insurance brokers? They pinpoint the areas of risk in your business. Eliminate or deal with as many as you can, and inform your broker about what actions you've taken. This should help reduce your premium costs.

4. Shop around. Get quotes from several brokers, do some Internet research, and talk to friends and business associates about their insurance coverages. Be informed before you decide.

5. Insure the building, not the land. There is no need to insure the land that the building stands on. The land can't be damaged, destroyed or stolen. Your property insurance should cover the replacement value of the structures only, NOT the land.

Schedule Annual Insurance Reviews

Review your policies once a year with your insurance agent, to make sure you're still adequately covered and still getting the best value for your money. Laws and regulations change, and it's important to be sure that you haven't left a gaping hope in your coverage out of neglect or lack of information. You may have bought new equipment, expanded your operations, hired more employees since you bought your insurance - any of these events can mean your coverages are no longer adequate. Or perhaps you've scaled back your business and sold some assets, in which case you may be over-insured.

Regular reviews are the best way to determine whether your current insurance coverage is still sufficient for your growing business.

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