When a New Business Can't Pay Its Bills

Photograph by Betty Images

Question: I opened a small coffeehouse 12 weeks ago in a great, growing neighborhood. The business is just about paying for itself, but I’m out of money and out of resources. I’m afraid now with the growing bills and collection calls I’ll be forced to sell the place. Is there another alternative?

Answer: This is a tough but unfortunately all-too-common situation that occurs when business owners open without sufficient capital to keep them operational throughout the startup phase.

Your business plan—if you wrote one—should have included a realistic break-even analysis, which is a calculation that estimates how many months it will take for your business to become profitable. Given that time frame and your expected expenses, you should have amassed enough capital or secured a line of credit to cover operations at your coffeehouse until that time.

Companies reach the break-even point when their revenues are sufficient to pay all their operational expenses and begin to generate profits. The calculation is done by adding up all the company’s fixed costs and dividing that figure by its unit selling price (a cup of coffee, in your case) minus its variable costs.

There are many online resources that explain how to do this, including this Small Business Administration article, and this sample business plan. Don’t confuse the break-even point with the point at which you would recoup your upfront outlay of capital to get the business started; that typically comes much later.

“No business should plan to be profitable until about a year” after they open, says Bob Phibbs, founder of retail consultant The Retail Doctor. If your business is not generating profits and it has just begun to establish itself in your location, it will be difficult to sell for the price you want, he says.

Your options at this point are limited, says Philip Moorcroft, chief executive officer of Moorcroft Group, a Toronto management consultant. “Unless you can secure more financing from friends and family, it’s pretty bleak,” he says. “You may have to close down and consider this a valuable lesson in how not to run a business.” Phibbs agrees: “Find a rich aunt or call all of your friends. Selling isn’t the way out.”

If you have made some good impressions with customers and suppliers, they may be places to look for additional investment, says Julie Gordon White, CEO of BlueKey Business Brokerage M&A in Berkeley, Calif.: “If there’s a customer who really loves what you’re doing, that might be someone to ask for a loan or investment.”

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