How Startups and Entrepreneurs Can Avoid Bankruptcy

By Friday, September 12, 2014 0 No tags Permalink

Most businesses fail within the first few years of opening their doors. There are a lot of reasons for this. Maybe the entrepreneur overestimated how popular his product would be. Perhaps she failed to market her product or service properly. Most likely, though, a new business will fail because the entrepreneur behind the company fails to manage the company’s money properly and is forced to declare bankruptcy.

Small business bankruptcy is a common, but not inevitable problem. There are things that you can do to keep from having to declare it yourself.  Here are just a few of them.

Overestimate Your Needs

How much money do you think you will need to start up and run your business for three years (three years is the average length it takes for businesses to make a profit)? Do you have a number in mind? Great! Now increase that number by at least 100%.

When setting up your business and attempting to attract investors, it is much better to overestimate the amount of money you’ll need to stay up and running. The only time it is okay to count on sales to keep your business afloat is after you’ve managed to turn a consistent profit for a few years and have built up a significant savings on which your company can count for operating costs.

Investments Are Better Than Loans…If You Can Get Them

When it comes to finding funding, it is much better to bring in investors than it is to bury yourself in debt. Here is the good news: there are a lot of things that you can do to attract investors, even as a startup. It is important to understand, though, that investment dollars (unless they are from angel investors) are rarely free. typically investors ask for a percentage of the profits for a number of years, some stock in the company or even spots on boards of directors (if your company goes public).

This might sound like a less than ideal situation, especially if your autonomy is important to you. Even so, it’s better that miring your brand new company in at least five figures of debt before it’s even a year old, right?

Your Taxes Are Your Top Priority

Businesses have to pay a lot of taxes. There are income taxes, payroll taxes, property taxes, federal taxes, city and state taxes, sales taxes…you get the idea. These taxes are incredibly important. If you don’t pay enough or, worse, forget to pay at all, you face mountains of fines and problems. In terms of priority, paying your taxes is more important than anything else—more important, even, than paying yourself. Always pay your taxes on time. There are no exceptions to this.

Pay Your Bills On Time

Bills are inevitable. Pay them on time. Pay your taxes, then pay your bills, pay any employees you have and then pay yourself. Being even one month late on a bill can send your business into a financial spiral that could end your business before it really gets off the ground.

Understand How Bankruptcy Works

Even if you do everything right, sometimes bankruptcy still looms. It is important in this situation that you don’t give up. We tend to think of bankruptcy as an all or nothing game but here’s the truth, there are some chapters of bankruptcy, such as Chapter 7 Bankruptcy, that will allow you to keep your business’s doors open. What’s important here is that you talk to your lawyer as soon as your finances start to go awry. Your lawyer can help you avoid bankruptcy or, in the worst case scenario, help you file for a bankruptcy chapter that hopefully won’t leave you businessless.

Have we missed any important financial advice? Let us know in the comments!


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