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5 Effective Ways to Prevent Business Bankruptcy

5 Effective Ways to Prevent Business Bankruptcy

Bankruptcy is not an ideal position for any person or business. It can cripple you financially in the future, so many people tend to do their best to avoid it. However, things sometimes do not go to plan, which can cause major disruptions that a company may not be able to overcome. When it comes to bankruptcies, the best way to avoid them is by steering away from bad debt. Borrowing money that is not meant for growth and development is a recipe for chaos.

However, you can always try to avoid it by implementing these methods.

Renegotiate with Creditors

If the circumstances that forced you to go bankrupt were drastic and unforeseeable, talking to your creditors might help your situation. Let them know that your business is struggling and might need a little more time to return the money. For example, COVID-19 is putting many firms in distress, and if the virus continues to ravage businesses, they will need to renegotiate almost everything, including internal contracts with employees. Negotiating with creditors is imperative because it will help your company get more time to pay off the debt or can allow you the opportunity to reconfigure the way you pay off the debt. You may pay reduced monthly payments or restructure the whole loan.

Debt Consolidation

Debt consolidation can help you get rid of loans that are sucking life out of your business finances. Some loans are prohibitive and can be bad for your business, but you can try reorganizing debt in a way that will make it easier to pay off as a unit or even restructure the loan to be paid within a longer timeline. This method works best when you have several creditors, and you want to make payments seamless. You can get rid of expensive loans and only retain those loans that are favorable to you. If there are debtors who have refused to negotiate, you can pay it off by taking out a different loan with better terms, or you can sell some items to facilitate this.

Filing a Consumer Proposal

Instead of filing for bankruptcy, you can opt for a consumer report. Finding other options apart from filing bankruptcy will help your creditors understand your business better so that they can accept your proposal, making it a best-case scenario for all parties. It will help you retain your assets and maintain steady relationships with your creditors. This way your reputation and credit score will not be affected negatively.

Practice Austerity Measures

If you find yourself in a financial hole, you need to ensure that the hole does not get bigger, so stop doing those things that make it harder to escape it. You may have to scale back production, human resource, and office resources, but doing so gives you a chance to reduce debt through revenue.

You should also implement lean business methods to keep your business in a good position. Lean methods emphasize quality over quantity when it comes to employees and materials, and it also involves setting up data-backed decision-making. It can include getting rid of senior executives to bring in hands-on employees or switching to automation.

Reassess Business Performance

It is often good for any businessperson to review the status of his or her business periodically. When you do, look at the essential business metrics such as revenue, profit margin, costs, and other ratios. This will help you avoid falling into debt and going bankrupt. For example, you want the cost of production to go down to improve profit margins. You also want revenues to grow steadily because growing your business too fast is one of the causes of bankruptcies. Responsible growth ensures that every expansion has a reliable and robust base.

It takes some deliberate effort to keep bankruptcies, especially in times of crisis, at bay; however, one can implement several methods to help keep their business running. Assessing your company’s position regularly can give you a glimpse of whether your business model is sustainable or not, or if you need to renegotiate and/or restructure your current loans. If you have exhausted all your options, you may want to exercise the consumer proposal option as it works most of the time, and it shields businesses from external debt shocks that every business person is bound to encounter.

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by Harvey Carr // Harvey Carr is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.