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How Debt Nearly Bankrupted My Successful Business

By Spodek Law Group | February 20, 2024

How Debt Nearly Bankrupted My Successful Business

When I started my consulting business 5 years ago, it was just me working from my home office. I slowly built up a client base by networking and word of mouth referrals. Within a couple years, I was doing well enough to lease some office space and hire a few employees to help me manage the growing workload. Business was booming and I felt like I was really making it as an entrepreneur.

However, I made some key mistakes that eventually caught up with me. I took on too much business debt too quickly without properly planning for economic downturns. I also failed to reinvest enough profits back into the business to sustain rapid growth. Over time, the debt burden became crushing. Within a span of 6 months, I went from driving a new BMW to facing the possibility of declaring personal bankruptcy.

Taking on Excessive Debt

When business was thriving, I got overeager and took out large loans to expand operations. This included:

  • A $100,000 small business loan to move into a bigger office space
  • $75,000 business line of credit to hire more staff
  • $50,000 equipment leasing loan to upgrade computers and software

I also maxed out credit cards to cover day-to-day operating expenses like payroll and vendor bills.

At first, the debt was manageable because revenue was also growing 20-30% year over year. But when a few major clients cut budgets due to economic factors I couldn’t control, I suddenly couldn’t cover the debt payments.

I had to lay off staff, downsize the office, and slash other expenses. But by then it was too late – the debts were overwhelming compared to the revenues coming in.

I couldn’t even keep up with interest payments on the loans and credit cards. I had to resort to taking cash advances on new credit cards to cover payments on old cards, which made the hole I dug for myself even deeper.

Failing to Properly Reinvest in the Business

Another major mistake was failing to reinvest enough profits back into the core business during the good years. I was so focused on withdrawing money to buy cars, take nice vacations, and enjoy the entrepreneur lifestyle that I neglected ongoing investments in operations, marketing, and future growth.

When crisis hit, I didn’t have sufficient reserves or profit margins to weather the storm. Let’s compare my actions to what I should have done:

What I Did

  • Leased luxury car for $700/month
  • Took tropical vacations 2x per year
  • Kept profits to pad personal bank account
  • Only invested minimum needed to keep lights on

What I Should Have Done

  • Driven reliable used car
  • Taken modest local getaways
  • Reinvested most profits into the business
  • Funded marketing, IT upgrades, training

If I had made wiser financial decisions when times were good, I would have had enough cash flow and reserves to handle the downturns. I learned this lesson too late, unfortunately.

Facing Bankruptcy and Rebuilding

Over the course of a year, I depleted my financial resources until I had to make some extremely difficult choices. I sold assets like cars and jewelry to cover urgent bills. I lost my house to foreclosure when I couldn’t make mortgage payments. My personal credit score tanked below 500. And I still owed over $250k to various business creditors.

I sat down with a small business bankruptcy attorney to discuss options. He reviewed my assets, debts, income sources and counseled me on the pros and cons of declaring Chapter 7 vs Chapter 11 bankruptcy.

In the end, we decided not to formally file bankruptcy because I wanted to honor my debts. Instead, I worked out payment plans with creditors I couldn’t fully pay back yet. I also took out a personal loan from family members to help get through the worst of it.

Over the next couple years, I slowly rebuilt my consulting business back up by focusing on quality clients and keeping an iron grip on finances. I moved into a small rental apartment, drove a used car, and lived frugally while paying down past debts. My credit score gradually recovered over time as well.

While it was a long road back, I successfully climbed out of near bankruptcy. And I learned lessons about financial prudence and planning for rainy days that I will carry with me for the rest of my entrepreneurship journey. My business is now stable, profitable and built to withstand future downturns.

I share my story so that other entrepreneurs can hopefully avoid making similar mistakes. Rapid growth is exciting but dangerous if not managed carefully. The foundation of any thriving business must be strong financial controls, wise capital allocation, and planning ahead for changing conditions. Never take on excessive debts that could sink the company during crisis. And be sure to save and reinvest enough during boom times to sustain the long term vision.

Key Takeaways

  • Grew my consulting firm quickly via excessive debt that crushed me when clients cut budgets
  • Failed to save and reinvest enough profits to sustain rapid expansion
  • Lost house to foreclosure and nearly declared personal bankruptcy
  • Forced to sell assets & take loans to cover overwhelming business debts
  • Learned to rebuild prudently for long term success, not short term gain


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