Small businesses meet their share of challenges throughout the lifespan of their enterprise. However, the pandemic has created a new set of problems for small businesses. Many owners were forced to temporarily close their doors or struggle to find enough healthy workers to sustain operations. Bankruptcy has become a somewhat standard option for small businesses amid the pandemic. While some companies simply can’t avoid bankruptcy, it isn’t always the best or most reasonable solution for others.
Table of Contents
- Signs it’s time to declare small business Bankruptcy
- How to Avoid Small Business Bankruptcy
- Wrap Up
Signs it’s time to declare small business Bankruptcy
Sometimes, bankruptcy is inevitable, regardless of the steps taken to prevent it. It’s not always a bad thing, either, especially for small business owners struggling to stay afloat.
Small businesses facing lawsuits, financing mishaps, poor leadership, and less-than-ideal market conditions could benefit from filing bankruptcy. The process leads to a quicker closure for companies that want to cease operations and a manageable debt solution for businesses that want to remain open.
If you believe small business bankruptcy is your best option, consider contacting a bankruptcy attorney from wh Law to guide you through filing. That said, if you’re not ready to skip to Chapter 11 just yet, here are a few ways your small business can avoid bankruptcy.
How to Avoid Small Business Bankruptcy
Although bankruptcy data shows a significant decline in business bankruptcies since 2009, more than 21,000 businesses filed for bankruptcy in 2020. Some of those businesses may have avoided bankruptcy by taking advantage of the following strategies.
1. Determine where the problems lie
First, analyze your company’s past and current financial performance to decide what’s causing the company’s current situation. Commonly, financial problems can stem from:
- Economic conditions
- Not targeting the ideal customer
- Poor leadership
- Improper accounting
Once you identify the root of the issue, you can work on solving it. Some factors, like economic conditions, are more challenging to overcome because they’re outside the company’s control. However, government programs may still be available to assist businesses caught in the cross hairs of economic decline.
2. Cut costs
Cutting unnecessary expenses and finding ways to make necessary costs more affordable are critical tasks for small business owners on the brink of bankruptcy.
One financial drain for many businesses is insurance policies, including health insurance for employees and property insurance for a physical location. Speaking with an insurance agent could help you decide which procedures are necessary, which to drop, and which to reconfigure for better affordability.
Not being mindful of debt interest can also take a toll on your finances. Reconfigure your payoff strategy to tackle high-interest debt first.
Finally, look for other cost-cutting opportunities, including staff cuts, supplier changes, and different marketing strategies.
3. Collect outstanding debts
Do several clients or customers owe money to your business? If so, it’s time to insist your clients deliver on their outstanding invoices. All those late payments cut into your company’s financial stability.
Start by sending payment reminders via email, text, mail, or phone. Then, follow up in a few days, a week, or a couple of weeks to remind customers who still haven’t paid. Making a quick convenience call can also help customers who need an extra nudge.
When other efforts fail, partnering with a professional collection agency could steer your customers back on track. These services cost money, but they also have the power to recoup a good portion of the debt owed to your business.
4. Revise your budget
Consider the help of an accountant to reconfigure your budget to one that works for your business. The new budget should focus on paying off old debts without accruing additional debt. Negotiating with current creditors could lower your monthly bills or give you better interest rates to whittle down debt faster.
It may be an excellent time to sell unnecessary assets. The extra cash could give you a bit more wiggle room in your budget or help you pay off debt once and for all.
5. Consider funding options
Adding partners or investors to your business could be an excellent way to secure extra operating funds. These business people typically require a portion of your revenue as payment, but they’ll also bring more money into the fold.
Your state might also offer incentives for your business, including tax credits, loans, bonds, or grants to fund its operations. Check with your state’s Department of Development to see what’s available.
6. Explore government assistance programs
The United States government has long had protections in place for small businesses struggling financially. However, since the pandemic, more programs have cropped up, giving small business owners a fighting chance to keep their companies afloat.
The Small Business Administration (SBA) creates and manages many of these programs, including the Shuttered Venue Operators Grant and SBA Debt Relief. The somewhat new Paycheck Protection Program allows small businesses to keep employees on their payroll. And government-backed small business loans can also benefit companies that may not qualify for a traditional bank loan.
7. Find ways to boost productivity
Boosting productivity allows more yield with fewer people. While this sometimes translates to letting employees go, other businesses find ways to maintain their payroll but avoid adding new employees to it.
Zone in on productivity by temporarily working longer hours to complete tasks or switch to a new computer system that automates tedious tasks. Partnering with a few freelancers to take over some duties can also help, as can transitioning employees to remote work.
8. Understand and use eligible tax credits
The government makes several tax credits available to businesses, but many of them aren’t well-known without the assistance of an experienced tax accountant. Available business tax credits recognize minority employment, the use of a plug-in electric motor vehicle, and paid family and medical leave, to name a few.
The American Rescue Plan has also added or extended credits, like the Employee Retention Credit and the Paid Leave Credit. Refer to the IRS and the U.S. Department of the Treasury for more tax credit information.
Bankruptcy doesn’t have to be a be-all-end-all for all small businesses. Rethinking a budget, paying off debts wisely, and cutting unnecessary costs can prove to be the bailouts that work for many companies. Savvy entrepreneurs should also take advantage of the numerous funding and assistance options for small businesses to keep their heads above water.
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