Studies show that about 1/5 of small businesses cannot make it for more than a year. This is not surprising knowing the extreme difficulties faced by new business owners in maintaining their ventures. Most often than not, small businesses face collapse amid the many financial issues they encounter.
If you are one of the many small business owners facing bankruptcy, below are some things you can do so you can get your business back on track.
Know the Different Types of Bankruptcy
Bankruptcy is a legal process that involves a person or business that is no longer able to repay its outstanding debts. The debtor files the bankruptcy petition, and with this, all assets of the debtor are measured and evaluated to see if they will be enough to pay off portions of the debtor’s outstanding debts. While many consider bankruptcy as the end to their ventures, some consider it a tool to help their struggling businesses survive.
Small business owners can choose from the three types of bankruptcy before filing. These include chapter 7 bankruptcy, chapter 11 bankruptcy, and chapter 13 bankruptcy.
Chapter 7 involves the selling of all business assets. The proceeds are used to pay all creditors as stated in the Bankruptcy Code. In this type of bankruptcy, the business will no longer continue its operations and will face inevitable closure.
Chapter 11 provides small businesses a chance to reorganize and avoid permanent closure. It allows businesses to continue their operations under the management of a court-appointed trustee. Instead of closing permanently, the businesses must file a detailed plan of reorganization, which should include an outline on how they are going to pay all their creditors. This type of bankruptcy is meant for partnerships and corporations.
Chapter 13 is for the reorganization of businesses as well. But unlike Chapter 11, this type of bankruptcy is for self-employed individuals or operating an unincorporated business.
Improve Your Credit Score
Bankruptcies can cause credit scores to take a dive, making it more difficult for business owners to get funding to continue their ventures. This can be extremely disheartening to entrepreneurs, but this does not mean that they will never be able to get back on their feet. If you are in this type of situation, you can make efforts to improve your credit score slowly. Credit scores can be enhanced by paying off bills on time, paying off mortgages, and so on.
Learn from What Happened
Take your bankruptcy experience as a learning tool to do better the next time you engage in business. Evaluate why your previous venture did not succeed and see which areas you need to improve to not make the same failure next time. Use your previous failures as a stepping stone to do better in your next endeavors, making sure not to make the same mistakes again.
Seek Financial Help
Businesses that have undergone bankruptcy can have a challenging time getting loan approvals. The best thing you can do in this instance is to ask for help from someone who has a good credit score and who is willing to help you rise from financial collapse. Partnering with someone who has a good credit score can help you get the loans you need for your business. If you cannot find one, you can choose to look for investors willing to invest in your business.
Rising from bankruptcy can be difficult, but it is not impossible. Once you have learned from your previous mistakes, you will have higher chances of succeeding the next time around.
Determine Whether You Should Still Continue the Business
Bankruptcies are often the catalyst for some businesses to close permanently. But at other times, this does not mean the end of the endeavor but a chance to reorganize and do better. If your business is facing bankruptcy and you are in a quandary of whether to continue its operations, you might want to consider the following before coming up with a sound decision:
- Was the business profitable, or was it losing money continuously? If it used to be profitable but was just hit by hard times, it may make sense to stay and weather the storm until it ebbs. But if it were the latter, closing it temporarily could be your best option.
- Does your business have more assets than liabilities? If yes, then saving it might be a good choice. But if there are more liabilities, you might want to close it down for good.
- Will creditors go after your personal assets if you close your business for good? This often happens in sole proprietorships. In this regard, if you opt to close the business, you might want to file for Chapter 7 bankruptcy and wipe out the personal guarantee on the business.
It may help to consult with an attorney first before filing for any bankruptcy. This will help you decide which type should be filed for your business.