Primary Causes For Business Bankruptcy

By: KMArticles

At least eight out of every ten business owners at some point face financial difficulty. Whether it's the overall economy or poorly design business strategies, there are only three choices for a business that faces the financial crunch.

  • Option 1 - Find a way to secure more financing,
  • Option 2 - Default on your loans and
  • Option 3 - File for a business bankruptcy.
    The third one, though the easiest way to escape the snarling creditors, leaves a black mark on the credibility of the business owner. This may have both business and personal effects. 

While most business owners take the first or third option, you should understand what business closure and business failure means. They are different entities. While a business may close down because of business bankruptcy, closing down a business intentionally does not necessarily mean failure.

Primary Causes For Business Bankruptcy And Its Effects
Reasons why a company file for business bankruptcy.
One large problem may be at the root of a failing business. More commonly, however, a company's troubles are from various factors working against the owner. Some of the most common factors are:

  • 1) Outside business conditions like an increase in competition, general costs of running a business, troubles inflicted by local hooligans etc.
  • 2) Inside business conditions like a weak management, inappropriate location, client loss, trade credit problems etc.
  • 3) Financial problems like loss of capital, inability to secure new capital when needed, high debt or difficulties with cash flow.
  • 4) Tax-related problems: Often small business owners do not keep a keen eye on the tax structure and when they finally notice, the hefty amount crushes their resources.
  • 5) Accidents: Even though insurance supposedly covers this, bureaucratic red tape can prevent the owner from getting his or her money. 

Negative Outcomes of Filing Business Bankruptcy
Once a small business owner files business bankruptcy, the owner may be unpleasantly surprised by the aftereffects. Here are some of the unforeseen negative outcomes of filing business bankruptcy:

  • 1) The court assigns a trustee to the bankrupt business. This individual the forces the sale of business property without the owner's consent. The trustee then pays off creditors.
  • 2) Although the business owner expects the judge to take away all their debts, many of their loans are secured. This means that not all debts go away and the court can force the sale of property to pay the secured creditors. 
  • 3) Foreclosures only stall the lender's efforts temporarily.
  • 4) The business owner suffers a damaged credit rating.
  • 5) Bankruptcy also affects the co-signors of the business loans.
  • 6) If the owner decides to stop the bankruptcy process, he or she will find out that withdrawing from a Chapter 7 filing is almost impossible.

Business bankruptcy may not be a business owners best choice. If a business can overcome poor planning and a lack of financing, the owner is better-off continuing to run the business until it turns a profit. Otherwise, just closing the doors to the business and paying of the debts may be a better way of dealing with a troubled business.

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