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Creditor Proof Your Business


Gregory Clarke on April 28, 2010 in Advice for Business Owners

Your business is most likely the riskiest asset you hold. It is affected by a variety of issues including the economy, labour issues, supply issues, and cash flow to name a few. Many business owners forget to take precautionary steps to protect their investment. Unfortunately, some of those owners may discover that they are too late and regret not spending some time now on some strategies.

Here some things to consider:

Your retained earnings and shareholder loans are at risk: most owners don’t think about it this way but you are an unsecured creditor in your own business. If something goes wrong, you’ll be last in line to get anything out of the business. That can be changed. Typical structures include the use of a holding company and/or a trust to transfer your retained earnings out of the operating company and loan back the amount needed for working capital purposes. The loan to the operating company along with any other shareholder or director loans are then secured by a General Security Agreement registered under the Personal Property Securities Act (“PPSA”). It is also very important to ensure that your registration is renewed on-time to ensure the continuity of your security status. Typically, these registrations under the PPSA are only valid for a period of five years so it is important that you ensure that the registrations are renewed on time.

Fraud: Fraud exists in almost every business. The difference is the dollar value and extent of it. The best way to guard against it is to ensure that you have a strong control environment in place. Even this will not stop it entirely but it will make it harder for the perpetrator and increase the likelihood that they will be caught. This doesn’t mean that you need a complex system and a large accounting department to develop a good control environment. Controls can be put in place for smaller businesses that can be effective while still allowing for your business to operate efficiently.

Separate your real estate from your operating company assets: if your company has a significant investment in real estate, you may want to consider separating those assets from your operating company. If you establish a separate real estate company then those assets are separated from the operations of the business that typically attract more risk. If something goes wrong in the operating company, then the real estate assets are not at risk to creditors.

Insurance: Ensure that you talk to your insurance advisor and that you have the proper coverage for your business. The key is to understand the coverage that you are purchasing and any exceptions in the policy to ensure you are getting exactly what you need.

Accounts receivable: here are a few things to consider:

  • Review your credit policy to ensure it is adequate for the current economic environment. Your policy should include credit checks for all new customers and even for regular customers to ensure there are no problems.
  • If you don’t already do it, consider requesting deposits or retainers from your customer before doing the work. This will limit your exposure should the customer not be able to pay.
  • Ensure that you track your accounts receivable aging and have internal guidelines on how you will follow up with clients for payment and when that contact will occur. The sooner you can obtain payment on the account, the better your cash flow will be and your risk exposure will be reduced.

Supply chain: ensure that your major suppliers are financially sound. A break in your supply chain could be disastrous to your company and its creditability. Perform regular credit checks on key suppliers and request references to gain some reassurance that the company is financially sound and can deliver on its contracts.

These are just a few strategies to protect your assets. Ensuring that you structure your business to protect your wealth is important. It takes some planning and thought now to provide some protection in the future if you need it.