Small businesses: how to survive bankruptcy

The global pandemic is certainly taking a toll on the economy and a lot of small businesses are suffering the consequences.

Bankruptcy happens when a business can no longer pay its debts or doesn’t have enough assets to cover its liabilities. As cash flow and market demand can shift dramatically in a short period of time, small businesses are usually the ones that struggle the most during these difficult times.

And even if talking about bankruptcy is something no one wants to do, it is necessary to understand how it happens and what to do.

For businesses, there are typically two types of bankruptcies:

1-     Liquidation

In this case, the business owner turns everything over to a bankruptcy trustee and walks away. The trustee will liquidate the assets and pay its creditors.

2-     Reorganization

In this case, the owner runs the company and gets the job done. There might be times in which a court-appointed trustee takes place, but this happens only if the owner or manager is suspected for being dishonest or not doing a good job. During reorganization, the debtor will define a new business plan and seek approval from creditors.

Filing for bankruptcy is usually considered a failure, but it doesn’t have to be that way. Before you get to that point, there are certain red flags that, if detected on time, will mitigate the disaster. Follow these steps:

Recognize the signs

Warning signs are usually on the records. Check your cash flow reports, as financial statements are the key to reading your business and detecting problems at an early stage. These statements will help you see where the money is coming from and where the money is going. If you can see this early enough, you might be able to make the necessary adjustments and correct the problem.

Detect the root of the problem

You need to take the time to seriously determine what is causing the problem and whether it is something you can control or not. Avoid personal liability issues at this stage. Failing to make payments will only make things worse because not only will you still have to deal with it later, but also you will have to pay penalties.

Contact your lawyer

Find an attorney with expertise in bankruptcy and turnaround strategies. Ideally, it should be someone with experience in your own industry.

As soon as you start noticing warning signs, it is a good idea to get professional help before things get really bad. Preparing yourself for a potencial bankruptcy when things go bad doesn't mean you need to file for one.
Actually, filing is not the solution as it is usually expensive, time consuming and complicated, let alone the emotional weight it carries as well.

Even in these situations, you can still plan for success. Approach your creditors with a tailored financial plan that gives you credibility. If your business is failing for the first time, most banks appreciate you coming to them early enough to let them know what the situation is and how you plan to deal with it. 

Bankruptcy doesn't happen overnight. It is a long process with different stages and in many of them, you can still manage to save the ship.  And even if there is no way of doing it, you need to acknowledge the situation and plan for a wind-down bankruptcy, as challenging as it seems.

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