Though finding a benefit in the upheaval of the Great Recession of 2007 is a challenge, it does appear to have furthered the demise of the societal stigma associated with personal bankruptcy. Studies suggest that the stigma of filing for personal bankruptcy began in the 1990s. Since many small businesses are closely associated with their individual owners, it seems fair to assume this trend also applies to those entrepreneurs.
Whether it’s from increased prices for materials, upward wage pressure, higher health insurance costs or, more typically, a combination of factors, many small business owners continue to struggle to manage their current debt levels. While still well below the historic levels seen in the mid-2000s, small business bankruptcy filings continue at a brisk pace.
While bankruptcy remains a possible solution for a small business overwhelmed by debt, there may be other viable options. Here are some of the advantages and difficulties attendant to a few of the most common ones.
Make an Honest Assessment
Each of the bankruptcy alternatives discussed below presumes that it is your business’ debt, rather than general economic trends, market changes or some other factor, which is the problem. As such, the first order of business is to objectively assess whether aggressively attacking debt will pay a long-term dividend or merely postpone the inevitable.
Reduce Costs to Increase Cash Balances
Start by identifying the individual costs that are the most problematic and look at all potential ways of reducing them. Perhaps you can find a less costly phone service provider or office space. Also, consider liquidating currently unused equipment or supplies, even if you may need to replace them if and when things turn around.
Toughen Up Your Collections
Many small business owners lack the discipline or disposition to be assertive with customers whose payments are overdue. While “dialing for dollars” can be awkward, remember that your debtors may be just as dependent as you on cash flow and will understand your situation. If pressed tactfully but firmly, they may be willing to remit at least some portion of their overdue payments.
If you have a large AR balance, selling your accounts at a discount to a collection agency or debt buyer could be a way to generate cash quickly, but you’ll need to decide whether the benefit is worth the possible damage to your business relationships.
Revamp Your Budget
A budget is only good if it accurately portrays your business’ projected income and expenses. It’s safe to assume that if your business is deeply in debt, yours doesn’t meet this minimum standard. Get help from your accountant or other professional and create a budget that reflects current reality, not a best case. It can always be adjusted if things go better than projected.
Prioritize Debt Payments
Another tip that may seem obvious but is often overlooked. Whenever possible, pay down your highest-interest-rate debt first. For many small businesses, this may be a credit card balance.
Don’t Dodge Your Creditors
Whether it is the bank or a supplier, many creditors know that by the time trustee and legal fees are paid and collateral (if any) is liquidated, they are unlikely to be fully repaid if you declare bankruptcy. They will often be willing to work with you to come up with a viable debt restructuring or consolidation or another plan. However, your creditors cannot work with you if you do not reach out and give them an honest assessment of your situation.
Seek Counsel
If you are not up to the task of negotiating with creditors, consider getting a professional third party involved. Contact local nonprofit debt counseling agencies and ask if they work with small businesses as well as consumers.
In addition, while they naturally understand the nuts and bolts of the bankruptcy system, an experienced business bankruptcy lawyer can suggest creative options alternative solutions to bankruptcy.
Call (951) 468-0633 today to reach Tran Bankruptcy Law.
NOTE: This is for informational purposes only and does not constitute legal advice.