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How Debt Nearly Bankrupted My Successful Business

The Early Days – Rapid Growth Through Debt

In the early days, I took out loans and lines of credit to invest in inventory, equipment, and even a small office space. It seemed like a good idea – the more inventory I had, the more sales I could make. And the better equipment allowed me to work more efficiently.

Business was booming. Year over year from 2013-2017, I had over 50% sales growth. I was even featured in the local business journal as one of the fastest growing companies in my city. Taking on debt didn’t seem risky with how quickly the business was growing.

I got loans to:

  • Buy more inventory so I wouldn’t miss out on sales
  • Upgrade to better manufacturing equipment
  • Open a small storefront location
  • Hire my first few employees

At my peak, I had nearly $250,000 in business debt across various loans and credit cards. My personal credit cards were also maxed out on business expenses.

But when you’re seeing constant growth and profits, debt seems like no big deal. I thought I could pay it off with the growing profits of the business.

Storm Clouds Gathering – First Signs of Trouble

In 2018, I started to notice some cracks forming in the rapid growth story of my business. Sales were still growing, but at a much slower pace. Costs were going up across the board – inventory, materials, employee wages. Profit margins started shrinking.

I had to tap into my lines of credit more frequently to cover payroll and keep purchasing inventory. I kept hoping sales would pick back up to their previous rapid growth, but they never did.

In 2020, COVID hit and completely upended my business. Sales dropped over 60% almost overnight. Revenue went from a steady $30K a month to barely $10K a month.

I tried everything to stop the bleeding – letting go of most employees, halting plans to expand, liquidating unused inventory. I stretched my credit cards to the max to keep making payroll and pay the rent.

But when you have as much debt as I did, there’s only so long you can tread water before you start to drown.

Crashing Down – Facing Bankruptcy

By mid 2021, the debt had become crushing. Between rapidly compounding interest and being maxed out across all my business lines, I owed over $350K. I had run out of options.

I missed my first loan payment that year. Then another. And another. Lenders were calling me daily, demanding payment on these high interest loans I had taken out years before.

I couldn’t sleep. I couldn’t think straight about how to save the business. I was facing bankruptcy and the end of over 10 years of blood, sweat and tears.

I considered just walking away – closing up shop completely and starting over. The shame and despair of losing everything was overwhelming.

I felt like a failure, that I had let my employees and family down. That despite early wins, I couldn’t manage the business well enough to handle adversity.

But ultimately, I decided I had to try and save what I had built. I started working with a small business lawyer and an accountant to assess all my options.

Back From the Brink – Debt Restructuring

With my lawyer and accountant’s help, I began the long process of restructuring my debts in mid 2021. The goal was to get manageable payment terms so I could rebuild the business back to profitability.

It required difficult conversations with multiple lenders and creditors. We systematically categorized debts from highest interest rate to lowest, targeting the most toxic debt first.

I had to open my books and be transparent about the financial troubles I had gotten myself into. It was painful admitting just how much debt the business had taken on over the years.

But I learned through the process that most lenders want to actually help, not squeeze you for every last penny. They want to get paid back eventually. By showing I was committed to righting the ship, I was able to negotiate revised payment plans that were realistic for the business to meet.

It took over 6 months, but by early 2022, we had restructured about 75% of the existing debt. Interest rates were lowered across the board. Short term loan sharks were converted to 5 year+ reasonable payment plans.

I still had a mountain to climb to rebuild profitability and cash flow. But the business had stepped back from the edge of bankruptcy, and I had bought myself more time.

Lessons Learned – Growth Without Debt

I learned the hard way that rapid growth through debt is incredibly risky. When things are going well, debt seems inexpensive and safe. But when adversity hits, it can completely sink a business almost overnight.

Now, over 2 years since I faced bankruptcy, I have rebuilt sales back near our previous peaks, but through organic growth vs debt spending. Profit margins are healthy again and I have avoided taking on any new debt.

Here are my key lessons on growing a business successfully but sustainably:

Live Within Your Means

Never take on more debt than your operating profits can realistically pay back in 2-3 years. I got overzealous in the early wins and took on way more debt than made sense.

Build Cash Reserves

Put aside cash for rainy days before you spend profits on growth. I plowed everything back into more inventory and equipment when I should have built a cash safety net.

Focus on Profit First

Prioritize improving net margins, not just chasing top line sales growth. Unprofitable revenue will sink you eventually.

Running a successful business today is still challenging, but avoiding the debt pitfalls that almost ended me has made it sustainable for the long haul. While I don’t regret taking risks and chasing my dreams, I’m now much more prudent about living within our means.

I hope by sharing my own near downfall, it helps other entrepreneurs grow their businesses responsibly!

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