At its most basic level, bankruptcy is essentially a legal term given by a court when an individual or business is unable to repay debts to creditors. During a time of immense financial struggles, bankruptcy should be entered upon only as a last resort, entirely dependent on your business’s situation, as it is not often the best option. For instance, if there is a viable outcome where a small business owner has the cash flow and ability to achieve, bankruptcy may work, however, for many companies bankruptcy can be disastrous.
The pros and cons of bankruptcy
For companies or individuals experiencing significant debt, bankruptcy can provide an economic safeguard of sorts. It allows a company to strategize a financial plan for profitability and prevents small business owners from risking seizure of their personal assets. Depending on the type of bankruptcy, this status can give businesses an opportunity to postpone some financial obligations during a re-organizational phase and renegotiate contracts between labor unions. Chapter 11, for instance, is one type in which business owners can complete various steps to halt their downward spiral into more debt, thus allowing them to potentially save their company, personal assets, and possibly reemerge from bankruptcy entirely.
On the other hand, bankruptcy has the potential to be catastrophic for small businesses. Foremost, filing for bankruptcy can be extremely expensive, as U.S. lawmakers have expressed to the Senate Panel. Small business owners must weigh the pros and cons to determine if the minimal benefits of climbing out of debt is greater than the stress and cost associated with the process. Nearly 90 percent of small businesses that file for protection under chapter 11 have less than $10 million in debt or property. Considering the cost to file for bankruptcy protection can reach upwards of $100,000 to $300,000, this is certainly not the most affordable option. These costs can be even higher for situations involving a creditor dispute, which sometimes can reach as high as $600,000.
How to avoid bankruptcy
There are plenty of alternatives to revitalizing a business that do not involve filing for bankruptcy. The most obvious is finding more cash, even if that amount seems minimal. However, this step is often most effective when done early in a company’s financial struggles. In the beginning stages, small business owners may be more likely to encourage investors to assist or find individuals from whom they can borrow money. When that doesn’t work, occasionally changes must be made within a company, most often at the management level. Businesses benefit when new ideas are allowed to bloom and different individuals are welcomed aboard. When a company is failing financially, owners and managers need to recognize that changes must be put into place. Yes, the changes can be difficult and painful to implement, but the payoff can be life-changing and business-saving.
Bringing onboard a consultant who specializes in repairing failing businesses can help ease these changes. By introducing an outside opinion, an energized viewpoint and a fair evaluation, a consultant offers the same benefits as hiring a new manager or employees without the long-term financial commitment.
When all else fails, some small business owners may find that, as much as they’d like to hold onto their company, it simply isn’t logical in terms of the time and effort necessary to save it. An Assignment for the Benefit of Creditors (ABC) can be a valuable alternative to bankruptcy. Working with an ABC can be the most affordable and quickest option to distribute to creditors.
This article was written by Jessica Wasik for Small Business Pulse