Bankruptcy is a big word in a country like the United States. However, small businesses experience it quite often. About 50% of small businesses file for bankruptcy or eventually liquidate after five years. Knowing such a statistic is certainly problematic, but if you’re armed with the right knowledge, you can find ways to avoid it. First, let’s discuss what bankruptcy is all about.
What is Bankruptcy?
There are a lot of scary financial problems that people may encounter. However, bankruptcy might be one of the worst. With bankruptcy, a person or a business cannot repay its debts. It can be incredibly damaging to one’s credit score and make it very difficult to get loans in the future. Furthermore, bankruptcy can lead to wage garnishment, asset seizure, and even jail time.
Small businesses can file for two types of bankruptcies: Chapter 7 and Chapter 11. Chapter 7 is known as “liquidation.” This type of bankruptcy allows businesses to eliminate their debt. However, businesses must sell off all of their assets to do this. On the other hand, with Chapter 11 bankruptcies (which are much more common), businesses reorganize their debt and devise a plan to repay it. This process is known as “reorganization.”
Now that we’ve discussed bankruptcy let’s look at why small businesses may have to file for it.
Lack of Revenue
Small businesses may file for bankruptcy due to a lack of revenue. Businesses don’t have enough money to cover their costs and expenses. As a result, they can’t repay their debts.
The lack of revenue can be scary for many business owners, but it’s part of every business’s life cycle. Businesses go through peaks and valleys. They make money during the good times, and they lose money during the bad times.
The key for businesses is to manage their finances properly during the good times to survive the bad times. That means saving money when business is good, so you have a cushion to fall back on when business is slow.
If your small business is in a slump, there are a few things you can do to try to increase revenue:
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Review your pricing strategy
Ensure you’re not charging too much or too little for your products and services.
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Evaluate your marketing efforts
Are you reaching your target market? If not, consider changing your marketing mix.
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Have better products and services
Check if your products and services are up to consumer standards. If not, make changes, so they are.
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Improve your customer service
Make sure your customers are happy with their service level. If not, make changes to improve it.
By increasing revenue, you can help your small business stay afloat during tough times, without needing to file for bankruptcy.
Divorce
Sometimes the personal issues of the business owner can get into the way of the business. Divorce is an expensive endeavor, costing Americans at least $13,000.
It’s not just the cost of divorce that can hurt a small business. The time and energy it takes to go through a divorce can be a major distraction. When you’re going through a divorce, it’s hard to focus on anything else.
This can be detrimental to a small business because the owner cannot give their full attention to the business. If you want to avoid it, you’ll need help. That’s where an experienced divorce lawyer comes in. They can help you navigate the legal process to focus on your business. They’re also far more familiar with the financial aspects of divorce. They can help you keep your business afloat during this difficult time while reducing overall costs.
Wrong Market
Another reason small businesses may file for bankruptcy is that they’re in the wrong market. Being in the wrong market can be the business owner’s fault for not doing their research. One way to avoid this problem is by doing market research.
Market research is the process of gathering information about a particular market. Businesses must determine if there’s a demand for their products and services. There are several ways to conduct market research. First, you can do surveys. It can be online, over the phone, or in person.
You can also do focus groups. Focus groups allow you to gather information from a group of people in a controlled setting. This form of market research is particularly common in the food industry and can be helpful if you’re planning a menu for your restaurant.
Another way to conduct market research is by doing secondary research. This type of research uses data already collected by someone else, such as government agencies or trade associations.
Doing market research can help determine if there’s a demand for your products and services. If it isn’t, it may be time to consider a different business venture.
Small businesses often have to file for bankruptcy for many reasons. However, now that you’re armed with the knowledge of some of the leading causes, you can take steps to avoid them. If you do, your small business will be more likely to succeed in the long run.
