Learn everything you need to know and the steps you can take to keep your small business out of bankruptcy.
As a small business owner, it’s important to celebrate the wins and focus on all the ways your business is succeeding.
But it’s just as (if not more!) important to consider some of the challenges that your business may face (and how you can avoid those challenges)—and that includes the potential of going bankrupt.
No one wants to think about the potential of their business going bankrupt. But by understanding the steps you need to take to protect your business, you can avoid facing bankruptcy in the future—and keep your business solvent and moving forward.
So what, exactly, are the steps you need to take? Let’s take a look at everything you need to know to protect your small business from bankruptcy.
Table of Contents
Understand Why Small Businesses Go Bankrupt
If you want to keep your small business out of bankruptcy, one of the best things you can do? Get clear on why other businesses go bankrupt.
As a small business owner, it’s important to understand the common reasons why small businesses go bankrupt; that way, you can have those issues on your radar—and take the necessary steps to avoid them.
So, what are some of the reasons small businesses tend to stray from solvency and go bankrupt? Some of the most common reasons businesses find themselves headed towards bankruptcy include:
- Overextending finances: If your business spends more money than it brings in, eventually, it can—and will—lead to bankruptcy.
- Taking on too much debt: If your business has more business debts than business assets—and you’re unable to pay back your business debt obligations, whether secured or unsecured debt—it can lead to bankruptcy. (And, depending on the type of debt you’re facing and whether you offered a personal guarantee, as a business owner, it could also lead to personal bankruptcy.)
- Mismanaging money: Even if your business is bringing in a good amount of money (and has a high total money income), if you’re not managing that money appropriately and keeping your financial affairs in order, you could end up spending it too quickly or on the wrong things—which, again, can lead to business bankruptcy.
- Hiring the wrong people: Smart business owners know that their business is only as successful as their team; the sky is the limit for your company with the right people. But the flip side is also true—and hiring the wrong people can lead to serious trouble, including bankruptcy.
The point is, there are a handful of reasons why small businesses tend to go bankrupt—and as a business owner, it’s important to understand those reasons. (If you need further clarification on how to avoid having to file bankruptcy, you may want to talk to a professional, like a bankruptcy lawyer or a financial advisor; they can help you to understand the current state of your business and what, if anything, needs to change to keep small business bankruptcy at bay).
Always Prioritize Your Debts
As a small business, fulfilling your debt obligations is a must. If you don’t pay your creditors and/or lenders can take legal action against you to collect what’s owed—and that can force you into bankruptcy.
That’s why, if you want to avoid bankruptcy, you need to pay creditors and lenders—and make paying them a priority over pretty much anything else in your business.
Pay at least the minimum on any business debts you currently have. Make all of those payments on time. If you’re struggling to pay your debts, get ahead of the issue and talk to an expert to explore restructuring your debt; with debt restructuring, creditors can help you develop a repayment plan to cover your debts without going into bankruptcy.
Bottom line? Creditors and lenders aren’t going anywhere—and if you default on your debt, they can force you into bankruptcy. So, no matter what is happening with your business, make sure you’re always prioritizing paying your debts—and paying those debts on time.
Bring In Professional Help
We’ve touched on this already, but if you’re concerned your small business is headed towards bankruptcy, you should strongly consider bringing in some professional help.
The kind of professional help you bring in will depend on what type of support you need and where your business is financially. Some experts that may be able to help you avoid bankruptcy include:
- Financial advisor. If your business is just getting started—and you want to set yourself up to be financially successful—working with a financial advisor can be helpful. Financial advisors help small business owners figure out how to make the most out of the financial resources they have available. This can include everything from advising on tax requirements (which can vary based on your business structure, like a sole proprietorship or limited liability companies) to managing your cash flow to helping you determine which accounts and/or tools you need to manage your finances best.
- Debt consolidation specialist. If you’re already dealing with a significant amount of debt, a debt consolidation specialist may be able to help. Debt consolidation specialists will look into your financial situation to see if consolidating your debt obligations makes sense for your business. If so, they can help you consolidate your debt into a single loan with a competitive interest rate—which can help you get out from under your debt and get your business finances back on track.
- Business bankruptcy attorney. If your business finances are in a truly tough position—and bankruptcy feels like a real possibility—you’ll want to consult with a law firm that employs business bankruptcy attorneys. Bankruptcy attorneys evaluate the state of your business, looking at your entire financial situation (including business assets and personal assets vs. business debts and personal debts)—and then help you determine whether filing bankruptcy is the right decision for your business. If you decide to move forward with bankruptcy, the attorney will walk you through the bankruptcy process, help you file for bankruptcy, and represent you in bankruptcy court. (Keep in mind that the attorney-client relationship protects any sensitive and confidential information you share with your attorney.)
Use These Tips To Help Your Business Avoid Bankruptcy
No one wants to think about their business going bankrupt. But as a small business owner, it’s crucial to understand how to keep your business financially fit—and with these tips, you’re armed with the knowledge you need to keep small business bankruptcy at bay.