According to the U.S. courts, data shows that from 2016 to 2020 over 22,000 businesses went
bankrupt each year. This does not include the smaller businesses that could not make it but
chose to close their doors and walk away instead. When a business fails it may find itself deep
in debt from trying to stay afloat without sufficient revenue. In this case, the owners may choose
to file for bankruptcy in an attempt to save their company. Business bankruptcy is a legal
process that allows businesses to get a fresh start by paying back their creditors.
There are three different kinds of bankruptcy processes that businesses can file for:
- Chapter 7 Bankruptcy: an option in which the company is liquidated, meaning the
business and its assets are sold and the business is closed. - Chapter 11 Bankruptcy: a process where the business is reorganized and overseen by a
trustee who will ensure the business stays afloat and the creditors are paid. - Chapter 13 Bankruptcy: an option that allows debtors to pay off their debt while keeping
certain assets. The debt for business assets that are tied to personal assets is adjusted.
Businesses fail for a multitude of reasons, some of them internal and some external. Some of
the most common reasons are insufficient funding, poor market conditions, and bad
management.
Reasons Business File for Bankruptcy
There are a lot of reasons that a company is left with no choice but to file for bankruptcy. Some
reasons are very specific to the business itself, its products or services, or personal issues with
the owner. However, there are some more common reasons for business bankruptcies that can
be avoided.
Lack of Funding
When entrepreneurs start businesses it is not uncommon for profit to be minimal or non-existent
in the first few months. However, by the time these months are over and the business has
continued to pay for its expenses, owners can find themselves tens of thousands of dollars in
debt.
Finding the financing to start a business is very difficult, and many people choose to take out
loans or put expenses on a credit card to get things rolling. The problem with this is that there is
no guarantee a business will be successful, and if it is not there is no incoming cash flow to pay
for costs of things like advertising, supplies, rent, and more. In some cases, business owners
will try to hold out longer than they should, digging themselves deeper into debt. This eventually
forces them to file for bankruptcy.
Bad Market Conditions
Sometimes it is not necessarily the fault of the business that they go bankrupt, rather the
economic conditions are not good at the time they open. The economy is not a guarantee, and it
tends to go through a lot of ups and downs. During periods of time when the economy is down,
like during a recession, consumers tend to buy less and save more. Unfortunately for
businesses, this means fewer sales and less revenue.
Additionally, in some cases, the market grows out of a certain product, and if a business is
centered around something people don’t want anymore it can be difficult to stay open. For
example, after the rise of smartphones and music streaming apps, there was a lot less demand
for hard-copy CDs. As a result, small businesses selling CDs had a difficult time staying open
unless they shifted their products. As a result, many CD stores were forced to close or file for
bankruptcy.
Another reason the market may not be conducive to a business idea is that a company is trying
to sell something that nobody wants. If someone tried to open up a CD store today, they
probably wouldn’t do too well because most people have no use for CDs, and those who do can
find ones much cheaper at charity shops and secondhand stores.
Poor Management and Leadership
Poor decision-making and bad management from those who are in charge of the company is
also one of the largest reasons why companies go bankrupt. A business’s success is very
dependent on the product or service, but it is equally as important to make sure everyone
involved is doing their job right.
When someone starts a business, it is their responsibility to take care of the employees and
motivate them to work. An employee is going to be less likely to work hard or care about the
company if they do not trust the boss. One of the most important things about having employees
is getting them to like you and want to be involved in the business, especially if it is something
you are just starting out. If your employees don’t care about the company like you do, there is a
good chance it could be less successful.
At the same time, a general lack of good decision-making and poor planning from whoever is
managing the business can lead to bankruptcy very quickly. For example, say a business owner
spends a lot of time and money developing a service without doing the proper research into
whether this product is marketable. After spending all of that money, when they launch the
product it does horribly because there is actually no market demand for it. This major error on
the owner’s part has now cost the business too much money that they won’t be able to make
back, forcing them to file for bankruptcy.
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia
area.
