Any time a company experiences a business crisis, they begin to look at all of their options. The most drastic and definitive one? Filing for bankruptcy.
As executives around the world look for ways to navigate the pandemic, cash flows are drying up, spending has slowed and production is at a standstill. For many, this means the possibility of bankruptcy has moved from a last resort to a reality.
However, there are other alternatives to consider. Today, we’re taking a look at how to avoid bankruptcy in business. Read on to learn the strategies that could help your company manage existing debt, ease your financial burden and save your brand image.
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How to Avoid Bankruptcy in Business: Strategies to Consider
Depending on your financial situation and the type of business you manage, you can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy. While this can help relieve your short-term debt challenges, it can have lasting implications.
In addition to your personal credit score, it can also cripple your business ratings and make it infinitely more difficult to obtain future funding from lenders. It also puts a stain on your reputation and can negatively affect customer retention. That said, let’s take a look at a few steps you can take now to help avoid this move.
1. Eliminate Non-essential Expenses
Start by going through your budget with a fine-toothed comb. Are you currently paying for any expenses that you don’t need right now?
- Employee gym memberships
- Employee lunches
- Unnecessary travel expenses
- High-priced phone plans
- Off-site team events
- Company cars/paid transport
- Modern office improvements
Consider ways you can nix these costs and replace them with lower-priced alternatives. For instance, calculate what you could save if you swapped your phone plan for a Voice over Internet Protocol (VOIP) solution.
2. Sell Business Assets
While you can’t get rid of your mission-critical server equipment or your computer systems, it’s likely that you have idle assets sitting around your office that you could afford to liquidate.
Often, this extends past physical equipment. Is your parking lot too big for the number of employees parking in it? Offer to let surrounding businesses rent out some of the spaces.
The key is to carefully analyze everything your business owns and make sure it’s being used to its full potential. If it isn’t, downsize or sell it for extra revenue.
3. Prioritize Debt Repayments
While there are myriad factors that could force a company into bankruptcy, crushing debt tops this list. One way to avoid this is to prioritize your repayments above all else.
This means knowing what bills to pay first, and in what order. Regardless of your financial situation, there are certain debts you must repay on time to protect your business. Most of the time, this means prioritizing your high-interest payments to secured creditors.
Among others, these include:
- Payroll taxes
- Utility bills
- Phone bills
- Court judgments
- Secured loans
- Business rent
Failing to pay any of the above could mean losing your business altogether. Further down the list, you’ll find less-pressing forms of business debt, including:
- Advertising and marketing
- Subscriptions and dues
- Repairs and maintenance
- Unsecured creditors and vendors
4. Update Your Business Plan
Now is an ideal time to take a closer look at the business plan you penned years ago. While it might have been the document that helped you get initial funding, it isn’t written in stone.
That said, don’t be afraid to stray from the page and rewrite your vision. The new version should reflect the current state of your business, including the following aspects:
- Your enterprise strategy
- Your sales and marketing strategy
- Your operating plan
- Your capital-expense budget
- Your forecasts and cash flow projections
Along the way, if your financial situation continues to change, go back and revisit what you wrote, keeping an open mind to business process reengineering (BRP). We recommend BPR for many clients as improving processes can result in efficiencies and cost savings.
Ultimately, you want to keep your business plan as fresh as possible to help you mitigate debt and avoid bankruptcy.
5. Talk to Your Lenders
Sometimes, a few phone calls can make a world of difference. Stay in close contact with all of your suppliers and lenders and be as transparent as possible about your current financial situation.
Ask for lower monthly payments or more feasible repayment terms. Let them know that you’re considering filing for bankruptcy but would like to find an alternative. They may be able to establish a payment plan that can get you back on your feet.
Along the same lines, reach out to all your contract holders and try to renegotiate for more favorable terms. Then, obtain additional quotes for any services you’re currently using that aren’t under a formal contract.
6. Think Outside the Box
Now is an excellent time to reevaluate your company’s core differentiators. Are there unique ways you could spin them to generate extra revenue and offset your debt burden?
There might be ways you can sell your services and expertise as tangible products. For instance, if your company specializes in web development, you could create an e-book on digital design principles and sell it on your website.
From there, get creative and branch out. The answer might be as simple as expanding your purchase sizes, or as complex as creating an entirely new product line.
Avoid Bankruptcy & Regain Your Financial Footing
Whether it’s COVID-19 or another crisis, any unforeseen circumstance could put your company in a dire financial position. When this occurs, filing for bankruptcy can look like an attractive way out. However, knowing how to avoid bankruptcy in business can save you from many direct and indirect costs.
The tips above are a great starting point, but they can be complex. It’s critical to approach each one with caution, knowing the risks involved and the procedures to follow. If you need professional guidance, request a free consultation below.