Business liabilities refer to any debts owed by a company that will need to eventually be repaid. By definition, business liabilities refer to the amounts that are owed by a business at any time. For accounting purposes, they are often referred to as ‘payables’. Unless the business pays and collects only in cash, most companies will have at least one liability.
How Business Liabilities Work
When you buy anything for your business, you will have the option to pay either with cash from a checking account, or money that is borrowed. Borrowing money with a business loan or business credit card, for example, then creates a liability and a claim on your total assets by your creditors that you will need to at some point repay, either with cash or by losing other resources.
For example, when you buy from your suppliers using a business credit card, this is a form of borrowing that is a liability to your company unless the credit card is repaid before the end of the month. In a similar fashion, a liability will also be incurred by getting an overdraft, a business loan, small business loan, finance for a business vehicle, or taking out a mortgage on a business property. A company may also have liabilities from activities such as collecting sales tax from customers or paying employees.
Is it Good or Bad to Have Liabilities?
Some liability can be good for a business as leverage. It is defined as the use of borrowing to increase profits through acquiring new assets, which helps a business get and retain customers. For example, if a business is too small for the number of customers that are coming through the doors, borrowing money to expand the premises can be a good thing as, otherwise, the business is limiting its growth. By using a loan to expand, the business will be able to increase its income by serving more customers.
On the other hand, having too much liability is not good for business. If too much of a business’s income is spent paying back loans and other debts, there may not be enough left to ensure that other expenses are paid, which can lead to problems.
Why Your Business Needs Liability Insurance
There can sometimes be more to business liabilities than simply buying supplies with a credit card or taking out a loan to expand your business. In some cases, businesses can find themselves facing unexpected liabilities such as being held financially responsible for common workplace accidents or customer injuries, being held responsible for damage to property, or if the business is forced to defend an accusation of slander or libel. If you run a business, it is important to determine the liability insurance coverage you need. General liability insurance covers the most common risks that business owners face on a daily basis and is required for some businesses including general contractors, who will usually be required to get general liability insurance as part of the licensing requirements in the majority of states. It is the most common insurance type of small businesses and self-employed professionals and ensures that you are financially protected from large, unexpected liabilities such as accident claims.
How to Handle Liabilities
The best way to handle many liabilities in your business is with general liability insurance. While it’s unlikely to pay out for normal, everyday business liabilities like credit cards and loans, general liability insurance will make sure that that any large or sudden costs like workplace accident claims are covered, leaving you to get on with making sure that payments are made on time to your general business debts. Using general liability insurance will ensure that you are running a legal business depending on the state where your business is run, and can help your company expand, since potential employees, customers, clients and suppliers will be more likely to want to work with a company that is covered with general liability insurance. Finally, it allows you to focus more on growing your business, with peace of mind and no need to worry about how you’re going to cover the cost of any emergencies that might occur.
Liabilities generally refer to the debts that a business owe, but sometimes these can be large and sudden, such as in the event of a workplace accident claim. The best way to handle this is to get the right insurance policy.