No small business owner likes to admit that they are considering bankruptcy as an option for a struggling company they’ve built and nurtured. But, the sad fact is that about half of all startups will be closed within five years. Before you file bankruptcy, here are a few questions to ask yourself in hopes of salvaging your business.
Have you cut expenses as much as possible? Draft a cash flow analysis and a new budget based on your current financial situation. Look at office space and utilities to see where you can reduce overhead. Discuss extended terms with your creditors, including landlords, vendors and suppliers – they almost always would prefer to be paid more slowly or at a discount than not at all.
Can you free up fast cash? Do you have slow-to-pay customers dragging you down? Step up your collections efforts. Also, sell off equipment you are not using.
Have you prioritized your debt payments? As much as possible, pay down your highest cost debt first, so you minimize interest expenses. This could create some “preferential payment” issues in a future bankruptcy, but so long as you are making a good faith effort to keep your company afloat, you should have no big problem if you eventually have to file for bankruptcy.
Can you negotiate with creditors?
Be honest with your creditors about the tough financial situation your business is in. Inquire about a hardship plan or a reduced settlement option.
Can you consolidate your loans?
Try to consolidate several short-term loans into one long-term package to reduce your monthly nut and save on interest charges over the long term.
What if none of the above can keep the business afloat? If you have tried your best and it just does not work, you then have to consider how to best shut down your company. If it is an LLP, LLC or corporation, usually the best thing to do is just shut things down as quickly and reasonably as possible. Because your personal assets are probably not at risk, a bankruptcy is not needed as long as you have kept a clear distinction between personal and business finances and have not secured any of your debts with personal collateral, such as your car or house.
If you’ve been operating as a sole proprietorships or a limited or general partnership, your personal assets are probably at risk when you shut down the business. In this case, it is probably a good idea to considering a Chapter 7 total liquidation bankruptcy, or a Chapter 13 bankruptcy under which you remain in business with a structured repayment plan. If you are merely reorganizing the business debts and not your personal debts, which can be the case in partnerships, you can also consider a Chapter 11 bankruptcy.
Chapter 7 is the more likely option if your income and assets are low or nonexistent and/or your debts are large. Chapter 13 or Chapter 11 may be a better route if your debt is low and your income and assets have higher value, or if the business would be profitable when its debt payments are reduced.
Regardless of which path you decide to take out of your challenging financial situation, seek advice and support from a knowledgeable bankruptcy attorney to ensure you choose the best path.
Photo Credit: Chris Potter