One of the things I get asked quite often is “Why do people go bankrupt? What’s the common causes?” And I thought it fits into 3 categories.
Firstly, there is the individual that goes bankrupt, through, normally excessive use of credit cards, or finance is the main reason. The second reason is personal guarantees. Now, that can be personal guarantees of their own, where they’ve gone into business and made personal guarantees, or it can be personal guarantees, where they’ve guaranteed a car for a friend or that type of thing. The third one and by far the biggest that I come across is why people get bankrupt, because of their own business, and the mistakes they’ve made in business.
Now in some of my other videos, you would have seen, I’m a big one for believing that you separate your personal assets and your business assets. And if the business succeeds or fails, it succeeds or fails on its own, you don’t get involved in personal assets. And look, I’ve made the mistake and a lot of businesses that I see, where they get themselves into trouble and they think, “I’m in trouble, I can’t pay my bills from a business perspective, I’ll use some of my personal assets.” And so they remortgage their house, or they sell a car, or they sell some of their personal assets, or they provide a guarantee. And in that way, it’s your name that you’re using, which is your asset. So that is by far the biggest reason why people go bankrupt in the areas that I deal with.
In business, the business should be able to stand on its own two feet, and in standing on its own two feet, if it gets itself into trouble, it should be able to get itself out of trouble. Now, I’m not saying, “Don’t borrow money against your house to start a business!”. What I am saying is, is that when you go into business, you have working capital, and you may need to borrow against your personal assets to get your working capital, and that’s commonplace. Where we get into trouble is when we start borrowing against our personal assets to fix a business problem that’s been created because we haven’t been running the business in a way that is profitable. Now that might be too many staff, that may be poor accounting procedures, it may be a debtor in the business that hasn’t paid you, so you’ve gone broke. There’s a whole lot of reasons for that, but the business needs to stand on its own two feet. And we need to act like businessmen and make the decisions for the business to stand on its own two feet.