Jason Fisher is willing to share his story when it comes to the down side of entrepreneurship. The owner of Indie Ale House in Toronto became the talk of the entrepreneurial community when an equipment supplier went bankrupt, leaving him $800,000 in the hole on the verge of a new expansion project.
Fisher had all the right things in place. Since starting his business in 2012, he had posted year-over-year growth to the point at which he was in a solid position to open a new location.
His expansion plan was well thought out. The financing was in hand. Suppliers were vetted. He felt comfortable placing an $800,000 down payment for new equipment from Newlands Systems Inc. which had a stellar reputation within the brewing industry.
When Fisher got the call that they had filed for bankruptcy, he knew there was little to no chance of recovery. “We were probably one of the largest debt holders after the bank.”
The situation was dire. There was no legal recourse, and no insurance coverage for this type of contingency. “No one can perceive this kind of disaster,” he says. “As an entrepreneur you need to be ready for things to go badly, but in this case there were no warning signs. Giant corporations get bailouts, small businesses don’t have the lobby groups or resources to get any breaks.”
“While some might argue this type of situation would be covered by business interruption insurance, that is simply not the case,” says Sue Duggan, small business director for Northbridge Financial Corp. in Toronto. “It all goes back to the type of loss in question. Insurance is designed to address unforeseen circumstances. If the supplier had a fire that destroyed the equipment, it would be covered. Going bankrupt means it did not manage its finances.”
That being said, there are a number of policies available for small business owners that fall under the business interruption umbrella, such as coverage for loss of traffic due to a fire in a large store occupying the same mall; utility failures; suspected gas leaks; or even bomb hoaxes or nearby suicides/crimes that shut down neighbouring businesses.
Giant corporations get bailouts, small businesses don’t have the lobby groups or resources to get any breaks.
Jason Fisher, entrepreneur
So what can a business do if the setback doesn’t qualify for insurance coverage?
Minimizing income tax liability and maximizing deductions won’t recoup all losses, but it can help, says Brian J. Quinlan, partner, Campbell Lawless LLP, Chartered Professional Accountants in Toronto.
A business can write off the loss as an expense in the year that it happened as it is part of the cost of goods purchased, he explains. Any HST or GST paid on the expense still qualifies for an input tax credit.
If the expenses end up being greater than the revenues for that year and the business is operating at a loss, that loss can be used to reduce a business’ taxable income of a past or future year. “The loss can be carried back up to three years, or carried forward for up to 20 years which offers some benefits in minimizing your tax bills.”
Depending on the size of the business and revenue thresholds, businesses could reduce taxes by anywhere from 13 to 26 per cent.
Perhaps the best advice Quinlan has to offer small businesses is to make sure they get a line of credit when the going is good. “The banks will always give you one when you don’t need it but not when it’s an emergency. It doesn’t cost anything if you don’t use it.”
Fisher says he was one of the luckier ones hit by Newlands bankruptcy. He has managed to get his hands on used equipment to get him started and some cash flow to keep him going. “It won’t be a brand new system, but it should be enough to get us to our targets in the next two or three years.”