For a small business in financial difficulty, applying for bankruptcy could be the only viable way out of a financial mess. If you need help keeping your business afloat, debt restructuring under Chapter 11 or Chapter 13 (with limitations) can be the lifeline needed to stay in business. On the contrary, if your business is closing, a “direct” or “liquidation” bankruptcy could be the best option.
Small businesses vary a lot in terms of the types of products and services they offer, but all companies have to generate revenue and income to survive. When companies are not profitable for extended periods, owners may be forced to go bankrupt to exit the market or reorganize the business. Although the lack of profitability is the main reason for most bankruptcies, many underlying factors can inhibit a company’s ability to make a profit.
Many Businesses or Companies Can Go Bankrupt for Multiple Reasons
Bankruptcy can be the result of a series of other indirect problems that inhibit profitability. Some other factors that can contribute to bankruptcy are the physical location of the business, the loss of key employees, diminishing demand of their product, price or quality issues influenced by competitors, and personal issues such as illness or even divorce. Criminal activity and unforeseen disasters such as floods, storms, fires, robberies, and frauds can also cause difficulties that lead to bankruptcy.
Statistical data shows that the most difficult time for new businesses within a lucrative industry is the first five years, and many of them fail to meet their first-year goals, while only five percent go beyond five years.
Let’s take a more detailed look at some of the more common reasons for new businesses going bankrupt.
- Market Conditions
Bad conditions in the global economy and the specific market in which a business operates are the most common cause of bankruptcy. The economy tends to follow a rapidly expanding boom and bust cycle followed by pauses or recessions. During periods of recession, consumer confidence and spending tend to decrease, which can lead to lower-income for businesses. Companies involved in specific market niches may also be susceptible to changes in consumer preferences. For example, a small business owner who owns a music store might be forced to close its doors if customers start buying digital downloads instead of CDs. The competition of larger companies is another market factor that can cut into the income of small businesses and lead to bankruptcy.
- Capital Insufficiency
A common fatal error for many companies on the way to bankruptcy is having insufficient working capital in the first months of operation. Financing is one of the main challenges that small businesses face. Many business owners obtain loans to help finance their operations. If a company strives, its lender may be willing to grant additional financing, which could also lead to bankruptcy. Even if a homeowner can secure more financing to keep their business afloat in the short term, the high debt makes it more difficult for a company to be profitable in the long run since it has to pay interest on the debt.
- Poor Decision Making
Lack of planning and inexperienced leadership can lead to hasty, bad decisions and eventually, bankruptcy. For example, a business can spend time and money developing a product that it believes is convenient without first consulting customers or studying production costs to assess whether the product would even be profitable. Even if the product is useful, it may not be financially viable from a business point of view. Lack of education and experience in finance and management can increase the likelihood of poor decisions, although no company is immune from making mistakes.
The physical location is essential for the success of your business and a good strategic location can allow a struggling company to survive and thrive. The availability of a suitable workforce, local taxes, and duties, applicable laws and regulations, all depend on the physical location of the business. All of these factors can make or break the organization, and have an even more significant effect on smaller businesses.
- Excessive Growth
One of the main causes of bankruptcy is excessive growth that often occurs when business owners confuse success with speed. Instead of growing their business effectively over time, they choose rapid expansion even when their model can’t support such endeavors.
- Lack of Online Presence
In today’s digital world, having a significant and effective online presence is essential for customer interaction, and hence to establish the organization’s credibility. From a marketing standpoint, having an active online presence is even more important as it helps engage customers directly.
NYC Bankruptcy Lawyer’s Insight on How to Avoid Bankruptcy:
- Scan the Company’s Situation
Analyze key performance indicators and metrics regularly to know exactly where the business stands and whether predetermined objectives have been achieved or not. Setting smaller short term goals, as well as larger, realistic long-term goals is crucial to gauging the performance of the organization.
- Develop a Strategic Plan
It is essential to develop a strategic plan that allows having clear performance objectives that the company can follow in an organized and effective way to achieve its results.
- Have Financing
The company must show significant potential and be an attractive entity for investors to obtain financing from new partners.
- Always Stay Updated
Keep up to date with the clients’ needs, what they want, how much they are willing to pay for it, and also what they don’t need, in order to adapt and create a new business strategy if needed.
Quickly Resolve Bankruptcy
Studies show that fifty percent of companies go bankrupt due to lack of sales, forty-five percent because of financial problems, and five percent because of administrative problems. This happens when problems with sales are not dealt with timely or adequately, and eventually lead to financial problems because of insufficient sales. the financial analyzes are not adequate, the leverages and the debt costs are greater than the profits, which cause a greater complication and it becomes difficult to recover. In case we do not reach an agreement or that this does not ensure the viability of the company, you can always request the bankruptcy, which is a legal procedure, where to request it on time and voluntarily can be what saves the business. Nevertheless, if unfortunately, your company is witnessing bankruptcy, we advise you to immediately contact the best bankruptcy lawyer in New York. A good lawyer assists and guides you to file for Chapter7 or Chapter 13 bankruptcy in view of the case.