No Way Out?
Nobody likes to talk about bankruptcy, but if your business is failing and you can't raise enough capital to pay your creditors, then it is absolutely essential that you understand what bankruptcy is, how the process works, and what you can do to avoid it.
If you find yourself unable to manage your debts, you need to act early to avoid taking one more step on the slippery slope to bankruptcy. Lots of business owners refuse to acknowledge their financial difficulties; they prefer to stay the course and turn a blind to their mounting debts—basically, wishful thinking.
Once you have determined that bankruptcy is a viable option, if one that you want to avoid, then the next and best step is to begin to negotiate with your creditors.
Well, the road to you-know-where is paved with good intentions. In the end, if you hope to steer your business out of debt, the first step is addressing your difficulties frankly and directly, even if the process is painful.
The good news? As a solopreneur, the “smallness” of your business is actually an asset. If you're going to right a ship, you'd rather it be a canoe than a Cunard ocean liner, correct?
You probably have direct, personal relationships with your vendors and creditors, and you may be able to leverage your relationships, along with any goodwill you have established, against your outstanding debts. If you act quickly, then you may be able to bail your business out before it's too late.
Options Other Than Bankruptcy
If you have determined that your business is in deep trouble, the next step is to call an attorney. An experienced lawyer can help you navigate the often confusing legal terrain while you attempt to cut spending, raise capital, and consolidate your debts.
Next, do a top-to-bottom financial analysis of your business. What is the primary reason that your business does not have enough cash to cover its interest payments? Is the problem external (seasonal business cycles, inhospitable market conditions, competition) or internal (bad cash flow management, inverted payment priorities)?
Is there some sort of large overhead item that you could cut to cut expenses to the bone? If so, do it.
Next, if you have determined that BK is in fact a viable option, if one that you want to avoid, then the next and best step is to begin to negotiate with your creditors. Offer to make payments. Offer small lump sum payments if possible. Explain that you are broke and that the only other option is to file a bankruptcy. If you use the dreaded “bankruptcy” word, you just may scare them enough to work with you.
Another option: Get a loan: It is ironic, and maybe dumb, but if there is a possibility that an infusion of cash can really turn things around, then you have to consider that. But be careful – taking on debt to get out of debt sounds strange because it is.
Another option: Do nothing. If the amounts you owe each creditor are relatively little (under a few thousand) your creditors may just decide that it is not worth suing you. They will harass you for sure, and yes, your credit will take a hit, but in all likelihood your credit is shot anyway.
The Last Resort: Bankruptcy
If everything else fails or does not make sense, then it is critical that you understand your options and choose a bankruptcy model that fits your business structure.
Chapter 7: Commonly referred to as a “basic liquidation,” this is the best option for small businesses that are in dire straights—few assets, large debts—with little or no hope for future recovery. For solopreneurs and sole proprietors, Chapter 7 is often the most convenient form of bankruptcy. It wipes out most debts, but you will likely have to close the doors of the business.
Chapter 11: If yours is a bigger business, and you hope to rebuild it in the future, then Chapter 11 supports the continued existence of a failing business under a reorganization charter. The process can be very complex, and courts will often appoint monitors to scrutinize a business's recovery efforts.
Chapter 13: If your personal assets are tied to your business debts, then filing Chapter 13 rather than Chapter 7 can help you avoid the risk of losing your property or savings. Chapter 13 is a 3 to 5 year repayment plan but the good news is that you likely can keep your business going.
If, at the end of day, bankruptcy appears to be your only option, don't lose heart. Many, many successful entrepreneurs have emerged from bankruptcy to build better, stronger businesses. Check out what our friends at LegalZoom offer in this department — they can help a lot.
Is that your story? If you've come out of bankruptcy to start another business and experienced success, share your story below.