How to Avoid Business Bankruptcy

The picture painted by the numbers from the Bureau of Labor Statistics is grim. About 20% of all small businesses fail within their first year and by the fifth year, 50% of all small businesses will have failed. That is about half of all businesses fail.

That figure in itself is enough to discourage any would-be business owner who doesn’t have the grit and tenacity to push through.

While it is important to look at the failure rate and regard it as a cautionary tale, it is also important to look at just how many businesses succeed. After all, there are billions of businesses that function and make money throughout the world.

• Read: What it Takes to be a Successful Entrepreneur

If you are a “glass half full” kind of person, you could look at those numbers in this manner:

• Up to 80% of all businesses survive their first year
• Up to 50% of all businesses make it to their fifth year
• Up to 30% of all businesses will make it to their 10th year in operation

These numbers are more encouraging. It makes you wonder, what is it that these surviving and even thriving businesses have that the rest do not?

Tips on How Small Businesses Can Avoid Bankruptcy

One of the biggest issues facing each and every business owner today, regardless of how big or small their operation, is liquidity. According to the American Bankruptcy Institute about 26,000 businesses went bankrupt each year since 2013. These numbers don’t even include those businesses that just walk away from it all by simply closing their doors!

Bankruptcy is one of the biggest threats to thousands of businesses in America and indeed the world today. While there is a myriad of reasons why many of these businesses go bankrupt, it mostly boils down to the neglect of a few key principles:

• Liquidity
• Solvency
• Viability

In order to avoid going bankrupt, here are some tips that will help you solve many of these key issues:

Learn What Leads to Bankruptcy

If you are going to avoid bankruptcy as a business owner, the best way to do it is to start by learning what it is that leads you to bankruptcy. Here are some habits you want to avoid:

• Over-extension: In order to grow as a business, you must invest. The problem is that most business owners get carried away by this and borrow to heavily just to invest in their growth. Once your debt becomes too much for you to service you have very few choices other than calling a bankruptcy attorney and filing for Chapter 11.
• Poor bookkeeping: Businesses that do not have a handle on their books often find that their revenue is much lower than expected and their expenses are much higher than they thought. Often, by the time this realization dawns on them, it is too late to salvage the business.
• Over-optimism: Businesses work mainly on projections. When the outlook is rosy, most business owners invest in new people as well as projects that are supposed to make them money in the future. Should these projects fall through then the business owner is left in debt finds themselves in deep financial trouble.

Learning to tame these issues is a very huge step toward avoiding bankruptcy. You also need to do a few more things.

1. Prioritize Your Debt Payments

While one of the best ways to avoid over-extending is to avoid borrowing in the first place, sometimes that is not possible. Therefore, the next best thing is to prioritize your debt repayments.

You should pay very close attention to secured debt that has your business equipment or asset attached to it as well as other high-interest debts that could quickly snowball. If it is at all possible, avoid unsecured debt (credit card debt) completely.

2. Be in Open Communication with Your Lenders

You need to let your lenders know what is happening. Most people panic once you miss one or two payments and as such may take drastic measures to protect their interests.

The best way to go about it is to stay in open communication with your lenders and let them know what your plan is to pay them back their money.

3. Cut Costs

This is something you are supposed to be doing anyway as a business owner. Always look for ways to cut unnecessary costs and minimize expenditures.

Think of anything that is not integral to your business such as recurring charges for that software you hardly ever use. These are expenses you can eliminate.

4. Renegotiate Leases, Loans and Contracts

One of the most effective ways to go about this is to tell everyone that you are considering filing for bankruptcy and that you would really like to avoid it if possible.

Just because you are renegotiating your contracts, leases and loan payments does not mean that you will not pay them. It just means that you are looking for ways to lessen the monthly debt burden so you can service your current payment obligations.

Wrapping Up

You also need to get creative by finding different sources of short-term cash flow as well as talking your vendors into providing you with inventory on a consignment basis for the time being.

If you are open with your suppliers and lenders, then you will find that most people are okay with working with you to stay afloat because everyone wants to get paid.