The primary purpose of having a business is usually to generate profit. Unfortunately, it can be a serious challenge to open a business or keep a company solvent as the market changes. In recent months, for example, inflation has certainly put the pinch on numerous small businesses.
Rising costs may make it harder for companies to control their expenses and maximize profits. Sometimes, the debt that an organization takes on to buy materials or pay its workers requires monthly payments that are beyond the company’s current ability to pay. Business bankruptcy can be a way to resolve those financial issues, but many entrepreneurs and executives shy away from bankruptcy. When might bankruptcy be a smart approach?
When a company needs a short-term solution
Even generally successful companies can run into a rough patch. Perhaps there is a creditor who won’t wait the three months it will take for a company to finish a big project and get paid for that work. Maybe there were a few large, one-time expenses that put the company in the red and has left the organization unable to balance its budget.
In a scenario where the company overall has a workable business model and a track record of success, reorganization bankruptcy can be a way to repay creditors without liquidating resources and closing off a company’s access to credit. The alternatives to this process might include short-term business loans or factoring services. Companies with unpaid invoices, like commercial transportation companies, can work with a factoring company to receive an advance on the money that clients will pay for services already rendered or soon to be rendered. These solutions may help some but may lead to worse debts in other cases.
When a business owner intends to close the company
Business bankruptcy is also a viable option when an organization is going to close. Whether an unbalanced budget or the owner’s impending retirement is the actual cause of the company closing, bankruptcy can help. By discharging outstanding debts in a business bankruptcy, owners and executives can reduce their risk of personal responsibility for amounts still owed when the company ceases operations.
Seeking legal guidance to learn the basics about business bankruptcy can potentially help those who are worried about the financial solvency of the organizations that they own or run.