Bankruptcy is when a business or individual cannot pay back their debts, and the courts step in to reclaim assets or create a payment plan.
When we start a business, the last thing that we all want is to end up having to file for bankruptcy. Unfortunately, tens of thousands of bankruptcies are filed among businesses every year. In a time of great uncertainty, business bankruptcies hit a 10 year high in 2020.
In this guide, we’re exploring how to avoid bankruptcy and keep your business afloat even in tough times.
Why Small Businesses Go Bankrupt
A quick look through bankruptcy records will show you that there are a lot of reasons why small businesses go bankrupt. Every industry is different, but there are certainly some commonalities.
Perhaps the main reason for small businesses is that business lending is expensive. It’s hard to borrow money affordably so it is easy to spiral out of control.
Other common reasons include:
- Poor management and organization. For instance, if you aren’t prepared for a big tax bill or other expense, you may have to borrow money or avoid paying other debts.
- Overexpansion. Often, expanding a successful business can cause businesses to overstretch themselves and owe more money as a result.
- Lawsuits. If your business finds itself having to face legal action then it can be incredibly costly.
- Disasters. From flooding to natural disasters such as the recent Covid pandemic.
Common Types of Bankruptcies of Small Businesses
A quick overview of the types of business bankruptcies you will see when you search for bankruptcy records. There are three main types of bankruptcy claimed for by small businesses:
Chapter 13
This is usually best for sole proprietorships. It gives a plan for you to repay debts over time using your earnings, which can prevent you from losing your own personal belongings. Some people even lose their house in business bankruptcy.
Chapter 7
This is when a bankruptcy court appoints a trustee who distributes the assets the business owns to the creditors. A sole proprietor will then be discharged of the debt so they aren’t obliged to keep paying after this. It’s good for businesses that will cease trading.
Chapter 11
Chapter 11 bankruptcy gives businesses a chance to recover. A business files a plan of how they will reorganize and pay creditors, and a court-appointed trustee oversees this. A portion of debts are then repaid, but the business is often allowed to continue to trade.
Approved Strategies To Avoid Bankruptcy for Small Businesses
Of course, there are so many different ways in which businesses can fall into debt and struggle financially, but there are some ways you can avoid debts and make sure you have a positive plan for financial health in the future:
- Prioritize expensive debts. If you have credit card debts, for instance, repay these first if they are costing a lot of money.
- Don’t borrow more than you can afford. This is good advice in any area of life.
- Renegotiate contracts. If you can’t afford the prices of an item or a contract you have with a supplier, try to renegotiate it regularly.
- Don’t bury your head and hope it will go away. Financial trouble will catch up with you.
- Make sure you have a solid business plan. This should come with a financial plan to help you account for the future.
- Sell things you no longer need. This can be a good way to raise an influx of cash when you need it.
Wrapping Up
The rest of 2021 and beyond could be a really tough time for a lot of small and medium-sized enterprises, with risks of some going bankrupt. If you are running a business, it is vital that you stay organized and know where you stand financially, to give yourself the best chance to survive and even thrive in the future.
Bankruptcy is a good tool for those who have no other option, but it is best to avoid it if you want to give yourself the brightest possible financial future. Our tips can help you not to become another bankruptcy statistic and to see your business through turbulent times.