How to Avoid Business Bankruptcy with Financing
April 4, 2023 | Last Updated on: April 4, 2023

April 4, 2023 | Last Updated on: April 4, 2023
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As a business owner, the thought of going bankrupt can fill you with fear and trepidation, especially when the economy is struggling or your company is facing hard times. The fact is, 20% of new businesses fail in their first year, and only a small percentage last long enough to become institutions.
So why do these businesses fall into bankruptcy? And just as importantly, how can you avoid such a costly mistake? Keep reading to find out, starting with four of the most common reasons small businesses fail:
One way small businesses and nonprofit organizations differ from large corporations is the flexible financial reporting requirements. While publicly traded companies and large incorporated entities are required to publish their company’s financial statements quarterly and annually, many small business owners and startup entrepreneurs go long periods without preparing or reviewing an income statement, balance sheet, or cash flow statement. If something goes wrong when you’re running a business this way, you may not know about it until it is too late to do anything about it.
One of the best ways to avoid a financial crisis like bankruptcy is to keep on top of your financial health. Aside from reviewing financial records and understanding your business’s bottom line, there are several financial metrics that can be used to measure financial health quickly.
Gross profit margin measures the financial health of the company by looking at profitability. The gross profit margin is calculated by subtracting the cost of goods sold (COGS) from net sales. Any profit measured indicates that the business is making more than it is costing.
Gross profit margin = Net sales – COGS
The revenue growth rate compares current revenues to prior periods. The revenue growth rate is found by subtracting the current period’s revenues from the same period last year’s revenues and dividing that difference by the prior period’s value. A positive percentage indicates a successful business.
Revenue growth rate = prior period’s revenues – current period’s revenues
The DTI calculator helps small business owners and lenders understand how much of the business’s revenue is being used for debt payments on loans, lines of credit, and other financial liabilities. The ratio measures insolvency, by evaluating whether the business can pay its bills. Small business owners can evaluate their DTI to gain insight into making decisions about funding options, expansions, and staffing.
DTI = Recurring monthly debt payments/gross monthly income
If assessing your finances leaves you concerned about your business’s future, there are some steps you can take internally before reaching out to a bankruptcy attorney or getting a second job. Consider talking to your current lenders to arrange modified debt repayment or working with a management consultant on a business reorganization. There are also several credit counseling programs offered by both lenders and law firms that can help entrepreneurs avoid Chapter 7 or Chapter 11 bankruptcy. Some more direct actions you can take today to change the direction of your financial health include:
There are several financing options to consider before filing bankruptcy, including credit counseling and debt consolidation or restructuring. If your business is making too many monthly payments to lenders, refinancing with a new lender might be a great option to lower your monthly liabilities and improve your creditworthiness. If your business lacks the necessary funds to launch a new marketing campaign or purchase inventory in bulk, a line of credit or term loan may be the best way to access fast funds.
Every type of small business loan has different loan terms, eligibility requirements, interest rates, and funding methods. Before reaching out to a lender about business financing to avoid bankruptcy, get a better understanding of your options by preparing the following items:
Once you’ve gathered some documents and gotten a better understanding of both your business’s creditworthiness and your business needs, choose a lender to work with. Traditional lenders, like banks and credit unions, offer low-interest, long-term loans for businesses with excellent credit scores. Alternative lenders, like Biz2Credit, can offer several loan programs, an easy online application process, and flexible approval requirements. Once you’ve decided on a lender or narrowed the list down to a few, consider the following financing options as a way to increase capital and avoid bankruptcy.
A term loan is a traditional type of financing where borrowers receive a lump sum payment upfront and repay the debt over time with monthly payments. Long-term loans may be right for large loan amounts or for very large purchases, like commercial real estate. Short-term loans are common for small business owners that need additional cash flow to pay operating expenses, implement growth strategies, or compensate for seasonal revenue fluctuations. Term loans can be secured loans, where they use the borrower’s collateral to minimize the lender’s risk. This is beneficial to business owners that want a lower down payment or higher loan amount. Term loans typically offer lower interest rates and better repayment terms than other types of fast-funding loans.
SBA loans are a type of loan program where the U.S. Small Business Administration guarantees a portion of each small business loan. There are many programs through the SBA including the SBA 7(a) loan program and SBA Microloans. The eligibility requirements for SBA loans typically require a higher credit score and at least two years in business, and the approval process can take up to 30 days. For entrepreneurs that can get qualified and wait for funding, SBA loans offer a great, low-interest financing option.
A business line of credit is a type of revolving credit that works similarly to a business credit card. When a borrower is approved for a line of credit, a maximum credit limit is also approved. The borrower can then withdraw funds on the line of credit anytime they need cash for their business needs. Monthly payments are made up of principal and financing costs, calculated according to the annual percentage rate (APR). When the balance is paid down, the funds can then be accessed again.
Equipment loans, or equipment financing, are used by small businesses to purchase equipment or machinery, including computers, computer software, vehicles, construction equipment, commercial kitchen appliances, office copiers, and other fixed assets. The purchased equipment acts as collateral to secure the loan, so equipment financing is a great option for borrowers with bad credit or those approaching bankruptcy. The eligibility requirements for an equipment loan consider the value of the asset, the useful life of the asset, and the creditworthiness of the borrower.
A Merchant Cash Advance (MCA) is a fast-funding option for entrepreneurs that collect credit card revenues and need to avoid bankruptcy. When approved for an MCA, borrowers receive a lump sum payment upfront and repay the loan plus financing fees using future credit card or debit card sales. The financing costs of an MCA are higher than other types of financing, but typically borrowers with credit scores above 525 can be approved if their business has been operating for 18-24 months.
Running a business can be a very rewarding and challenging task. It is important for business owners to know where their business stands financially, by regularly reviewing financial reports and financial metrics, like DTI. If you suspect your business is in trouble, consider refinancing current debts or seeking credit counseling before filing bankruptcy. There are also several financing options, like a term loan or line of credit, that can be used to avoid bankruptcy. Reach out to Biz2Credit today to ask about ways your business can retire high-cost debts as this New York City IT consultant did with a $100,000 line of credit.
March 30, 2023