Helping With Your Financial Future

Reasons businesses go through bankruptcy

On Behalf of | Jan 4, 2024 | Chapter 11 Bankruptcy

Businesses go through bankruptcy for many different reasons. This doesn’t always mean that they have to close. For instance, a business owner could use Chapter 11 bankruptcy to reorganize their debt, allowing the business to remain open.

Moreover, the reason for the bankruptcy isn’t necessarily the business owner’s fault. For instance, perhaps the business was just caught up in an economic recession. Consumers didn’t have enough money to spend, so sales fell and the business had to close. Even the best business owners can’t always predict what the future is going to hold for the economy in general.

Not enough clients

One potential reason for bankruptcy is when a business only has a few clients. The company could be making over $1 million a year, but there’s a risk if it’s reliant on just two or three different clients for most of those earnings. If one of them leaves, that could disrupt the cash flow and make debt unaffordable.

No cash on hand

Another issue that sometimes occurs is that a business just doesn’t have any cash reserves on hand. All of the money is tied up in the company, perhaps because the business owner is focusing on growth. But this can put them in a difficult position if they suddenly need to have cash to take care of immediate costs.

Changes to the market

Finally, technology develops and evolves every day. Some businesses simply lose their competitive advantage. Products and consumer trends change. Record companies used to sell millions upon millions of compact discs, for example, but sales have plummeted in the last 10 years as most consumers now stream their music. These companies had to pivot, and many went bankrupt as a result.

As you can see, bankruptcy can be complex for a small business owner. It’s very important to know exactly what legal steps to take.