How to Avoid Bankruptcy and Save Your Business from Closing
According to the National Law Review, in July 2020, businesses holding over $100 in assets filed for bankruptcy.
Many brick-and-mortar businesses, especially those in the hospitality industry, closed their doors and ceased operations. Data from the Bureau of Statistics also shows that many new businesses close down within the first 2 years of operations.
Undoubtedly, running a business is certainly risky in these uncertain times. Despite the odds against the entrepreneurial spirit, you can still avoid bankruptcy and save your business by making some shrewd choices.
Why Do Businesses Go Bankrupt and How Can You Avoid It?
To avoid bankruptcy, you must understand why businesses become insolvent. That way, you can keep those issues on your radar and avoid them. Some of the common reasons for bankruptcy include:
- Overextended finances: A business that spends more than it makes eventually becomes insolvent.
- Too much debt: When a business takes on more debt than it has in assets, it cannot meet its operational obligations. All debt, whether secured or unsecured, can eventually lead to bankruptcy even if you gave a personal guarantee as the owner.
- Money mismanagement: If your business is making good profits but you are not managing your finances effectively, you might end up spending too much money on the wrong things. In some cases, business owners spend the money on personal obligations and ignore the business debts and operation costs, leading to bankruptcy.
- Hiring an incompetent team: Your business is only as successful as your team. With the right talent, your business can grow to unimaginable heights. On the flip side, hiring the wrong team could lead to its downfall and eventual bankruptcy.
To avoid these pitfalls, consider consulting a financial advisor or a bankruptcy lawyer to find out how you can seal the loopholes in your business and keep bankruptcy at bay.
How To Avoid Bankruptcy
Here are some of the things you can do to avoid bankruptcy and protect your business from closing:
Assess Your Financial Position
All businesses encounter growing pains. However, over 82% of small businesses fail because of cash flow problems.
If your business does not have enough cash to pay for recurring financial obligations such as utilities, payroll, rent, and other expenses, it may be difficult to keep it running.
Assess your cash flow to ensure you have enough money to pay debts on time and cover emergencies. If you do not have enough cash at hand to cover these expenses, consider trimming your costs.
You can also consult a credit counselor to help you evaluate your finances and make decisions to improve your financial position.
Cut Spending and Make a Budget
Eliminating unnecessary expenses can also help you meet your obligations. Consider areas where you can cut or eliminate costs, such as:
- Rent: Negotiate for cheaper rates per square footage or monthly rates. You can also look into subletting excess space.
- Outsource: Consider outsourcing non-essential functions such as administrative work or payroll.
- Review leases: If you are leasing any equipment, consider negotiating cheaper rates or leasing from different vendors with better rates.
- Reduce utility costs: Eliminate extra costs such as extra phone lines and reduce the number of staff or hire part-time staff.
Negotiate Supplier Contracts
If your business buys goods on credit, renegotiate contracts with suppliers to allow more time to pay and reduce payments.
Prioritize accounts payable and consider asking for extended terms of payment. Long-term vendors may allow extended terms of payment. However, if you have new vendors who cannot renegotiate their terms of payment, consider switching to cheaper suppliers.
Prioritize Debts
Businesses must prioritize their debt obligations. Failure to pay your creditors may result in legal action against you which could force you into bankruptcy. However, paying your lenders and creditors allows you to stay in business.
Plan which debts to pay first, such as payroll, income, and property taxes. Tax obligations should always be a priority, after which you should plan to clear all debts overdue by up to 60 days. After clearing the priority debts, clear all remaining bills starting with rent, utilities and other operating expenses, suppliers, and vendors, secured debts, credit cards, and insurance.
Use Government Programs
The Paycheck Protection Program was instituted to help businesses with less than 500 employees remain operational. The Small Business Administrative can also offer you a disaster loan to keep you afloat.
Loans from these government programs can be used for payroll costs, rent, utilities, mortgage, and interests among other expenses which can keep your business operational longer.
Hire Professional Help
Depending on the type of support you need, consider hiring professional help. There are several experts who can help you avoid bankruptcy including:
Financial Advisors
Whether you are starting your business or have years of experience, a financial advisor is an invaluable asset.
They can help you learn how to maximize your financial resources, give advice on tax requirements, and help you manage your cash flow. They can also help you choose the right accounting tools to manage your business finances.
Debt Consolidation Specialist
If your business is deep in debt, a debt consolidation specialist can help your financial situation. This professional looks into your debt to determine whether consolidation is the best option.
If it is the right move, they will help you consolidate your debt into one loan at competitive interest rates. This helps you clear your debt and keep your business solvent.
Business Bankruptcy Attorney
If your business seems like it is headed toward insolvency, consult with an experienced bankruptcy attorney. A bankruptcy attorney evaluates your financial situation and helps you decide whether filing for bankruptcy is the right move.
They will also help you through the process by filing for bankruptcy and representing you in bankruptcy court.
It is important to be honest with your lawyers as it helps them make the right decisions for your business. Any sensitive information you share is protected under attorney-client privilege.
Save Your Business from Bankruptcy
If you have taken all the steps to avoid bankruptcy, but it still seems inevitable. Consider filing for Bankruptcy under Chapter 11. This allows you to continue your business operations as you reorganize your debt.
Of course, you will be required to provide a reorganization plan to the court which explains how you plan to repay the debts. Once the plan is approved, you will also need to negotiate with creditors to restructure your debt. You can also sell off assets to clear some of your debts.
Before you decide to file for bankruptcy, get in touch with an experienced attorney to find out which options you might have to stay in business.
