Overall filings for bankruptcy in the U.S. soared to 43,425 across all chapters in March this year. Only 2,275 were new commercial filings, though, representing an increase of 16 percent compared to commercial filings in February.
Experts expect more bankruptcy filings to come, citing how the 2007 financial crisis led to bankruptcies that peaked in 2010. It is difficult to decide to file for bankruptcy and to close a business. There are also disadvantages apart from losing your company.
Why You Must Avoid Filing for Bankruptcy
A declaration of bankruptcy will affect both your personal and business credit score for seven to 10 years. Even as you start to rebuild your finances, you will have difficulty getting a personal or business loan. This will make it harder to pick yourself up and start again.
You will sever your relationship with your suppliers because your bankruptcy will mean a big loss to them. The bankruptcy process is lengthy, and it will take long for them to receive only a portion of what you owe them. If you want to reestablish your business later, you will have to look for other suppliers, and you will lose the benefits of a long-standing business association.
In Chapter 7 and Chapter 13, bankruptcy, the courts will seize your business assets and sell these to pay off your debts. Again, this will prevent you from easily reconstructing your company when you recover. You will have to start from scratch.
The bankruptcy process is also expensive and can cost you thousands. You will also be spending much of your time on it instead of being productive.
Act on Warning Signs
To avoid filing for bankruptcy, you must be observant to catch warning signs and act on them promptly. Hiring experienced general accounting services that cater to small businesses will help you monitor your company’s financial situation.
Suppose your cash flow makes it difficult for your company to pay rent, salaries, utility bills, and suppliers on time, this a large red flag. If it continues, you can be evicted, your utilities cut, and your supplies can be stopped. With no supplies, your business will be at a standstill. You can also lose your best employees.
Check if the cash flow problem is because your clients are not paying you on time. If so, immediately review outstanding receivables and collect payment. If your customer cannot pay in full just yet, agree on a payment plan so that you get some cash inflow. Adjust your policies and ask for payment in advance or cash on delivery for future sales.
If your sales are falling, see how you can recover. During the pandemic, retailers who pivoted quickly to online selling not only survived but even became more profitable. Consumers even purchased vehicles online. Study how you can apply this to your company.
You must also look for every opportunity to cut down on expenses.
If you and your employees can work from home, you can let go of your office and save on rent. This will also eliminate the office utility bills. Sell office equipment that you will not be moving to your home office.
If it is a matter of the company’s survival, you will have to let go of non-essential employees and retain only those indispensable to the business. Another option is to shift some employees from full-time to part-time work.
Switch to less expensive packaging for your products. Reassure your customers that the quality of the product remains the same.
Negotiate with your suppliers for a discount or longer credit. They are surely also affected by the pandemic and find ways to retain customers even if it means a cut in profits.
Seek Government Assistance
Check if your company qualifies for a state or federal assistance program. For instance, Congress approved the extension of the application deadline for the Paycheck Protection Program (PPP) loan of the U.S. Small Business Administration (SBA) to May 31, 2021.
From April 6 this year, SBA is also increasing the loan limit of the COVID-19 Economic Injury Disaster Loan (EIDL) program. Previously, it was only for six months of financial hardship with a maximum loan amount of $150,000. Now it is for 24 months of fiscal difficulty with a maximum loan amount of $500,000.
SBA announced on March 12 that it is extending the deferment period for all disaster loans to 2022. Those who took disaster loans in 2020 will make their first payments 24 months from the date of the note, while those who took disaster loans in 2021 will make their first payments 18 months from the date of the note.
Do not give up or lose hope because there is help at hand, and there is much you can do to keep your business afloat amid the COVID-19 pandemic.