California records more bankruptcy petitions each year than any other state. About 32,000 individuals and businesses file for bankruptcy in the Golden State annually, keeping bankruptcy lawyers in the San Fernando Valley or the Inland Empire, busy.
Individuals tend to file for bankruptcy more often than small businesses. However, small business bankruptcy cases are becoming increasingly common.
Chapter 7 bankruptcy, Chapter 11 bankruptcy, and Chapter 13 bankruptcy are all options for small business owners. They each operate a little differently, with Chapter 7 bankruptcy focusing on asset liquidation, Chapter 11 bankruptcy calling for creditor negotiations and debt restructuring, and Chapter 13 bankruptcy requiring repayment plans. The main difference is that only individuals can be Chapter 13 debtors. Therefore, if the business is a separate legal entity, it cannot be a Chapter 13 debtor.
Small businesses also file for bankruptcy for a wide range of reasons. Read more about them below so that you can attempt to avoid them at all costs.
Financial Factors
Financial challenges come with the territory when you’re running a small business. Surveys have shown that about two-thirds of small business owners face financial hurdles yearly.
Many small business owners overcome financial problems without filing for bankruptcy, but they aren’t all so lucky. Here are a few financial issues that may lead to small business bankruptcy cases.
Lack of Capital
Raising capital is the name of the game for startup companies, but they aren’t always able to bring in enough of it. Some underestimate how much capital they’ll need at the start, while others struggle to secure enough financing from investors.
Either way, a lack of capital can quickly become a big financial problem for small business owners. They’re sometimes forced to file for bankruptcy before their companies even take flight.
Cash Flow Issues
A 2024 U.S. Chamber of Commerce report revealed that almost 70% of small business owners are satisfied with their current cash flow. While this statistic is great for these businesses, it suggests that nearly one-third of small business owners aren’t generating a comfortable cash flow.
Everything from high operating expenses to inadequate financial planning might cause companies to suffer from cash flow issues. These factors may also lead to companies filing for bankruptcy.
Too Much Debt
Less than one-third of small business owners operate without any debt. The majority of them have between $25,000 and $1 million in debt, and about 7% have over $1 million in debt.
Debt overwhelms some small business owners and makes them believe that filing for bankruptcy is their only option.
Operational Factors
Financial problems cause many of the small business bankruptcy cases recorded each year, but operational problems might also result in financial catastrophes for companies. Next, let’s closely examine a few examples of these problems.
Poor Management
Small business owners must always keep an eye on the future while running their companies. If they don’t, they could mismanage funds today and fail to hit their projected financial goals.
Neglecting to manage a company’s funds properly is an operational problem that may lead to small businesses declaring bankruptcy.
Saturated Markets
Some markets are more competitive than others. In certain markets, there is so much competition that no small businesses can stand out.
When small business owners struggle to differentiate themselves from their competition, this significantly impacts their bottom line and can cause some of the financial problems we discussed earlier.
Obsolete Products and Services
Change tends to happen quickly within the small business world, and not all small business owners are prepared to keep up. If they can’t keep pace with the shifting demands within their industries, they might be stuck selling outdated products and services that don’t enable them to gain much financial traction.
Small business owners might end up in a rut when all they have to offer the world is obsolete products and services. This alone could eventually lead them to file for small business bankruptcy.
External Factors
Small business owners usually have at least some control over the financial and operational factors that cause bankruptcies. External factors are different, as they can’t be controlled. Listed below are several prime examples.
Bad Economy
Small businesses typically capitalize when the American economy is strong and improve their revenues. During economic downturns, the opposite is true.
The so-called Great Recession, for example, wiped out almost two million small businesses in just two years. Although recessions like this are rare, they often send bankruptcy cases involving small businesses skyrocketing.
Regulatory Compliance Issues
The U.S. government routinely changes the laws and regulations that govern how companies do business. In some instances, these changes affect how small businesses are run. They could even impact their potential profit margins by increasing costs.
Small businesses may lobby against these changes to prevent them from devastating their companies, but their efforts aren’t always successful. After they take effect, small businesses might have to file for bankruptcy.
Natural Disasters
Natural disasters are on the rise in the U.S. About 17 occur annually, up from an average of just three in the 1980s.
These natural disasters force small businesses to shut down for days, weeks, and sometimes even months on end. They do extensive damage to businesses and make it difficult for them to rebuild in their aftermath.
While many small businesses bounce back from natural disasters, some file for bankruptcy and close their doors for good through no fault of their own. Unfortunately, this trend could continue well into the future if natural disasters keep occurring at such a rapid rate.
Speak With a Small Business Bankruptcy Attorney About Your Company’s Financial Troubles
Hopefully, your small business won’t ever have to file for bankruptcy. If it does, you should know that financial recovery is possible following a small business bankruptcy case.
Janus Law can provide your small business with a bankruptcy lawyer to discuss your options. We will explain the ins and outs of Chapter 7, Chapter 11, and Chapter 13 bankruptcy and help you choose the one that will allow your company to recover from the financial, operational, and external problems mentioned here.
Contact us at (951) 686-6300 to discover more about the advantages of filing for bankruptcy on behalf of your small business.
At Janus Law, we guide our clients to new financial beginnings.
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