How Your Small Business Can Avoid Bankruptcy

Bankruptcy is a scary word for small businesses. If you own a small business, read this article for tips on how to avoid bankruptcy and stay afloat.


Starting a new business is a huge challenge. Keeping it going and making it profitable is another one.

How difficult is it? Well, around 80% of businesses fail within the first 18 months. That’s a pretty colossal failure rate.

Looking at it another way, 20% of businesses succeed. So what do you need to know to put yourself in that 20%?

Here are a few tips to help you avoid bankruptcy and succeed at starting a small business.

Don’t Spend What You Don’t Have And You’ll Avoid Bankruptcy

One of the easiest ways to avoid bankruptcy is to not have tons of debt. The easiest way to avoid debt is to not spend what you don’t have. We know, that sounds simplistic and not always realistic when starting up a business.

But, if you want to avoid bankruptcy you have to avoid going into debt as much as possible. Too much debt will strangle your business by eating up any profit and preventing growth.

Don’t take people’s word and spend money that they’re ‘about to send’. Too often, businesses run into troubles because they spent money too soon. A venture capitalist, a vendor, or a client has promised to send money.

But until you see it, you don’t have it. All too often small business owners get themselves into trouble spending promised money. What happens when it comes late? Or not at all?

Budget With Care

Always keep a watchful eye on your business budget. It is common that financial situations in small business are in a constant state of flux. If that is the case with your business, your budget should also be flexible.

If you’re not seeing much profit and considering more debt, something needs to change. If your work is not location dependent, you may be able to move to a more affordable spot.

Or, depending on their jobs, you might be able to offer some employees a work from home option. With fewer people in the office, you can move to a smaller space, and it cuts down on your utility bills.

If you do have debts, be sure that paying those off is a priority. Pay as much extra as you can. The faster you pay off loans, the more money you save in the long run.

If you have several lines of credit, focus on the ones with the highest interest first. Once you get out from under that debt, chances are you will see your business start to thrive.

Keep Personal Accounts Separate From Your Business

Many small business owners have fallen into this tricky trap. A thriving business should be making enough money to reinvest in itself and grow.

If your business is not making that money, you shouldn’t stimulate it with personal funds. Imagine what would happen if you make this common practice and your business goes down.

It’s an even bigger problem if the personal funds you used came out of your retirement accounts. Now, you have no business and your retirement took a big unnecessary hit. Depending on your age, you could be in serious trouble.

The reverse is also true. The money that your business earns should go back into your business. That’s how businesses grow and flourish. You shouldn’t be seeing that extra money as a slush fund for yourself.

Instead, keep your business accounts separate from your personal. An easy way to do that is to pay yourself a salary like everyone else.

That way, you get what you get. No more, no less. Run each budget as separate entities and don’t let the lines get blurred.

Hire Amazing Employees

Choose your employees with care, and stick with the amazing ones. An amazing employee is worth far more than a mediocre one.

Instead of hiring three people that do an okay job, hire one that does an amazing one. Even if you pay that one person a little extra, you’re still saving money. More work is getting done and you’ll have better employee satisfaction.

Of course, finding amazing employees is easier said than done. Keeping them and preventing too much turnover is another challenge.

One technique that you can use is to hire people on probation. If you see that they are not a good fit for your company, let them go. It’s better for you and for them. You need good employees and employees need a place they will thrive. If they’re not thriving with you, they will be happier somewhere else.

When Things Don’t Work Out

Unfortunately, not all businesses succeed. If you see that your business is floundering and you can’t keep it afloat, you need to look at your options.

You should avoid bankruptcy if you can. In some cases, you may be able to cut your losses and shut the business down on your own. In other cases, you may have to look at bankruptcy options.

There are several bankruptcy options available to small business owners. Chapter 7 bankruptcy is helpful when your business is underwater and all hope seems lost.

If your business still has potential, Chapter 11 offers a way to keep it going. You can use the process to restructure your debt and get on a payment plan.

Chapter 13 is like chapter 11, but the circumstances are more limited. For instance, your business can’t be a separate legal entity and you should be the sole proprietor.

Be sure to use your resources and talk to experts about your situation. For example, Stone Law Firm handles Chapter 13 bankruptcy. Talk with them to find out if Chapter 13 is the right option for you.

Keep Your Chin Up Even if You Couldn’t Avoid Bankruptcy

Building a business is not for the faint of heart. You have to be willing to take some risks and even fail a few times first.

Learn from your mistakes and keep moving forward. If your business fails, that doesn’t have to be the end of your career as an entrepreneur. You can always try again later. A different business plan or a better market can set you up better for success.

Be sure to always keep learning. Keep yourself informed by reading articles about current trends in small businesses. Armed with the new information you learn you can make another go at it.

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