How Liabilities Can Affect Your Business’s Operations

Liabilities are inevitable when running a business. Along with assets and equity, they are one of the three main elements of an accounting balance sheet. You’ll need to record all of your business’s liabilities on a balance sheet for accounting purposes. Liabilities, however, can affect your business’s operations in several ways. To learn more about liabilities, including their potential impact, keep reading.

How Liabilities Can Affect Your Business’s Operations

What Are Liabilities?

Liabilities consist of money that your business owes to another entity or individual. They are essentially the opposite of assets. Assets are items of value — either tangible or intangible — that your business owns. Liabilities, on the other hand, are instruments of debt. Whenever your business incurs a new debt, it will incur a new liability.

Common examples of liabilities incurred by businesses include the following:

• Business loans
• Credit card balances
• Legal debts
• Mortgage
• Accounts payable

Sourcing Goods and Services

Liabilities can make it easier to source goods and products for your business. Vendors, of course, require payment for their respective goods and products. Even if your business doesn’t have the cash for them, though, you can still purchase them by using a liability. You can charge goods and products to a business credit card, or you can use accounts payable. Regardless, liabilities allow you to source goods and services from vendors more easily.

Interest

Depending on the type of liability, you may have to pay interest on it. Some liabilities come with interest fees. Like personal loans, most business loans come with interest fees. Whether it’s a short-term or long-term business loan, you’ll probably have to pay interest on it. Interest fees for business loans can range from 3% to over 20%.

New Financing

Liabilities can make it difficult to secure new financing for your business. If you’re applying for a new business loan, the lender may check your business’s debt. Too much debt and too few assets can make it difficult to secure a business loan.

Of course, not all forms of financing are considered liabilities. There’s debt financing, and there’s equity financing. Debt financing consists of loans, credit cards and other debt instruments, resulting in liabilities. Equity financing operates in a different way. It involves the sale of your business’s equity — typically in the form of stock shares — to an investor. With equity financing, you can get money to run your business by selling partial ownership of it to an investor.

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