Should You Walk Away from Your Business?

The economic decline in the U.S. continues almost unabated, even after a few leading indicators briefly pointed towards the sky instead of the dirt. The shaky economy has impacted no one group harder than small businesses. Banks have tightened up their lending criteria, consumer demand is falling and most small businesses are freezing hiring or even letting employees go in order to remain solvent in the current climate.

In the midst of all this doom and gloom, small business owners are expected to keep all the balls in the air, ensuring that more gets done with less money and fewer human resources to keep the creditors from the door. It can be very overwhelming and many small business owners occasionally entertain the thought of packing it in and just walking away from the business. Is it ever a good thing to do?

The distinction should first be made between small businesses with no debt that simply stop doing business and those businesses that are going to walk away from debt commitments. In the first case, it may make sense in the face of a prolonged economic recession to suspend operations until the economy improves. To make that decision, a business owner has to make sure that he or she truly understands the nature of the company's losses. Are all businesses in that industry faltering? Are some doing something better than ensures their success? If the latter is the case, a small business owner should research their competitors and find out what they're doing right. If it is only their company that is facing rocky times, there may be ways to change and improve operations to increase the bottom line. However, if an entire industry is suffering, small business owners may choose to close the doors, at least temporarily, or change operations to focus on a completely different industry or product.

Small businesses that are carrying a mountain of debt, however, are a much different story and should very carefully weigh the long-term consequences of walking away from debt.

The first consideration is the security that was offered on the debt. Most new small businesses in the United States and Canada are required by their lenders to put up the personal assets of the business owner to secure the debt. Walking away from this may end up costing the owners their homes and cars. Some debt is secured with a general security agreement, meaning that the debt is backed by the assets of the business. Debtors could seize business assets or business property to satisfy the debt.

Even if no personal assets are put up as debt collateral, lenders can still sue the business owners for gross negligence if they believe that the owners intentionally let the business fail. Even incorporation is not a perfect shield from this substantial liability.

Another important consideration is reputation. If you live in a small community, how you handle the closing of your business could be water cooler fodder all over the city. This may make it difficult to open a new business or get a job.

So what are small business owners to do if they feel like they're drowning? There are resources out there to help. The U.S. Small Business Administration (SBA) offers one-to-one business counseling, a loan program, and other courses that can help you see past the current economic malaise and whip your business back into shape again. Your city may also have state- or locally-funded small business organizations with trained consultants to help you analyze your company and get it back on the right track.

Walking away from your business is never the only option and it frequently is not the right one. Asking for help is the first step in solving the issues.