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How to Avoid Bankruptcy if You're a Small Business


For small businesses, bankruptcy is a last resort. Fortunately, there are other, more advantageous alternatives to get out of debt and rebuild your poor financial situation.

While the thought of hiring an attorney or doing a DIY bankruptcy may be a temptation when you are in dire straits, knowing how to avoid bankruptcy and who to consult for a little help can set you free from years of frustration and bad credit.

Understanding Bankruptcy

Bankruptcy is not an ‘easy out’ and some debts, including child support, court judgments for injuries, student loans, and the last three years of past due income tax are not eligible.

Bankruptcy is divided into two main types, Chapter 7 and Chapter 13. In Chapter 7, often called liquidation bankruptcy, the debtor's property and assets are possessed, sold, and distributed to creditors. In Chapter 13, often called the wage earner’s bankruptcy, the debtors monthly income is garnished to cover debts.

Not only is the process of filing for bankruptcy complex and often financially demanding, but many small businesses may not even meet the qualifications to file. The consequences of bankruptcy include attending mandatory credit counseling, making ongoing payments to creditors, attending financial-management education, and a significant drop in credit score for 7-10 years, resulting in higher interest rates and difficulty securing future credit.

If this doesn’t sound too promising for your business, learning how to avoid bankruptcy is a better bet.

Never Reach the Tipping Point

Curb Spending and Assess Value

It may seem obvious, but take a hard look at balancing your books. Calculate how much you need to pay all of you creditors each month, as well as your necessary expenses. Necessary is a key word here! You will likely find superfluous expenses that your business doesn’t need to survive. Eliminate all charges that can be deemed luxuries, not necessities, and do not add value to the business.


Speaking of luxuries, are there any parts of your business that are not essential or contributing to its core? It may be worthwhile to liquidate some of these components to give the business a better balance sheet and access to more cash.

Structure Current Debt Repayments

Make a list of your current debts and reorganize it with priority given to the secured creditors and highest interest rates. Each creditor needs your money and you will have to pay them all, but use this opportunity to reach out to everyone on the list,create a dialogue, and ask for better repayment terms.

Late fees and interest rates will continue to add up and make your debts feel more overwhelming! The best solution is to address these topics before they become real problems. Follow our guide on Negotiating Credit Card Debt for Small Businesses to relieve this stress now.

Increase Your Cash Flow

Cash is still king when managing your operational costs and staying afloat during difficult times. Calculate exactly how much money you need to operate and evaluate the strategies for greater short term cash flow. Without enough money to keep your business operating comfortably, it will be difficult to focus, define, and solve the core problems contributing to your business debt.

Business loans and merchant cash advances (MCA) are both ways to access working capital quickly. To determine if an MCA is right for your business, read Evaluating Merchant Cash Advance Companies.

Consult with Experts

Weighing all the options and taking every available path can be a good method to avoid hitting the tipping point and filing for bankruptcy. Good thing you are not alone! Finding a knowledgeable outsider is often the best way to get a fresh perspective on your business’ financial state and the road ahead.

If you are already concerned with costs and wrestling with many of the unknowns about debt, working with a debt consolidation company is going to be one of your best options to avoid bankruptcy from the beginning. Get started by reading 13 Questions to Ask Debt Consolidation Companies!

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