How to Avoid Small Business Bankruptcy

E.J. Simonsen | Sep 30, 2022

How to Avoid Small Business Bankruptcy

Business owners know that strategically choosing to file a business reorganization bankruptcy can be beneficial. It can eliminate debt and force creditors to the negotiating table, which allows owners to remain in control of their own destiny. On the flipside, being forced or “put into” bankruptcy by a powerful and hostile creditor will result in a serious loss of control and oftentimes a total disaster. 

Unfortunately, life altering and unexpected situations arise, and your business may find itself backed into a corner with less cash than it needs. If cash flow is a problem or debt is piling up fast, it's important to be proactive in taking the proper steps to avoid a forced bankruptcy of your business. We can help.

Here are 4 dos and one BIG don't to help you avoid business bankruptcy. 

1. DO Leverage Equity in Assets

Most businesses have some machinery. Whether it's a piece of manufacturing equipment, a heavy-duty vehicle, or even a suite of expensive computers, these high-value, tangible items can be leveraged to help your business get back on its feet. 

Here are two key ways to leverage your equity in those assets:

  • Sell free and clear assets. With the money your business pockets, you can choose to lease only the equipment your business actively needs and just when it needs it. This way, you're not paying for more machinery than you need. Plus, if your business makes more on selling assets than the cost of the leases, you can use the extra cash flow to get ahead on business debt. 

  • Pledge equipment, vehicles, or machinery in exchange for a secured loan or a line of credit. If you don't think your business can recoup much from selling free and clear assets, you can instead choose to keep the assets and use them to leverage a loan or a line of credit. This is another ideal solution because it gives your business the chance at a secured loan, which will have more fixed and favorable terms. 

Leveraging existing assets is one of the best ways to get your business the cash it needs without taking unnecessary risks. 

2. DO Refinance

If your business has a good reputation for making payments on time, most lenders are willing to negotiate a refinancing plan before your business falls into default. Negotiating a reasonable refinancing through a reputable lender can help your business get a break on loan fees and interest rates. 

With lowered payments and reduced interest rates, your business can use the increased cash flow to start paying down other debts with higher interest rates and less flexible terms. 

3. DO Avoid Overhead Increases

The phrase "you have to spend money to make money" is too often used when a business is going through financial hardship. If your business is struggling to make payments on existing loans and debts, do everything you can to avoid an overhead increase. 

Now is not the time to upgrade the office, purchase new machinery, or hire a large crew of team members. The best way to avoid business bankruptcy is to keep your costs low and your profits high. 

Instead of spending on an expensive new team member who you hope could "right the ship," focus on your business's most profitable services. Even better, single out services that are profitable and that cost little in overhead. Work to optimize those service areas until you can get the business back on its feet. 

4. DON'T Take Out an MCA

This is our best piece of advice, and our one big don't for this article — DON'T take out a Merchant Cash Advance!

Merchant cash advance (MCA) lenders know that when a business is experiencing financial difficulties owners often borrow without counting the cost. Sadly, they or a broker may take advantage of your difficulties for their own gain. Avoid their debt "con"solidation trap, and stay as far away from MCA lenders as you can. Unfortunately, they are very good at convincing business owners that a small or "affordable" merchant cash advance is exactly what's needed to get back on track. 

The Lane Law Firm has seen firsthand that it doesn't work as promised. If you're being pursued by an MCA lender, it is in your best interest to connect with an experienced business debt relief attorney. They know exactly how to deal with predatory MCA lenders as well as what type of financial solutions will support your business rather than entrap it. 

5. DO Connect with a Reputable Business Debt Relief Attorney

The last point is a perfect example of why it's always a good idea to consult with a business debt relief attorney if you feel your business is at risk of bankruptcy. A business debt relief attorney can help you stand up to MCA lenders, and stop their predatory actions.

But what's more, a business debt relief attorney will listen to your small business's situation and provide both financial and legal options that suit your business's needs. Experienced attorneys also have connections with reputable accountants and business reorganization experts who can work together to help you get your business back on track. 

When you work with a business debt relief attorney, you gain access to the professional team you need to help pull your small business out of debt. If your business is having trouble avoiding bankruptcy, and you're not sure where to turn, look to The Lane Law Firm. We're here to help.


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