Is your business struggling to turn a profit in today’s economy? Are you having trouble meeting your monthly overhead, much less making a profit?
You might be considering bankruptcy — that might sound drastic, but bankruptcy may be the answer for many businesses, whether it’s time to liquidate and move on, or a restructuring of debt is necessary.
Though business filings accounted for 13 percent of all bankruptcy cases filed in 1980, in 2018 they accounted for only 3 percent, according to the American Bankruptcy Association.
Why? Because business owners are finding alternatives to bankruptcy that work for them, says Philadelphia bankruptcy lawyer David M. Offen. Let’s look at the alternatives to business bankruptcy, and see if they might be right for you.
Why Consider Alternatives to Bankruptcy?
If your business files bankruptcy, there are a few things you should know:
- If a business files Chapter 7 bankruptcy, it must cease operations entirely and liquidate its assets.
- There is no guarantee you’ll succeed: Only about one in three businesses filing Chapter 11 complete their reorganization.
- The business is responsible for paying legal fees, which can be as little as $15,000 but more often is $100,000 or more.
- You risk damaging your relationships with your vendors and creditors.
- You cede control of your business to the trustees.
- There are strict and somewhat onerous reporting requirements, and time is lost to completing the necessary paperwork.
As a result, it may be valuable to seek out alternatives to bankruptcy.
What Bankruptcy Alternatives Are Available for Businesses?
Many commercial lenders offer “work-out” or “turnaround” services, such as debt or finance restructuring. As an alternative to bankruptcy, debt restructuring involves negotiations and agreements with your business’ lenders and creditors to accept something less than what is owed or to change the terms or repayment based on the business’s ability to pay.
Creditors are often open to negotiation when they realize that you are considering bankruptcy as an option, because a creditor, especially an unsecured creditor, is likely to be treated less favorable in bankruptcy than in a private agreement.
In Chapter 7 bankruptcy, creditors get only what the liquidation of business assets brings, which may be far less than what they are owed and may in fact be nothing. In Chapter 11, creditors are forced to accept the treatment that their class of creditors agrees on.
Debt restructuring is especially effective when there are only a few debts to deal with.
If there are multiple lenders or creditors, it is less likely that they will all get on board with your plan, and filing bankruptcy might be the only way to get them all to the table to negotiate with you.
Obtain Alternative Commercial Financing
If your business’ cash-flow problem is temporary, consider alternative commercial financing, meaning a way to obtain capital apart from traditional lending institutions.
Alternative commercial financing often comes with looser credit and years-operating requirements, and are mostly available online, however, they can come with an exorbitantly high interest rate in exchange for these favorable terms. Some examples:
- Line of credit
- Short-term loan (warning, these often come with very high interest rates)
- Merchant cash advance (a merchant exchanges cash for a percentage of profits until the advance is repaid)
- Personal loan
- Business credit card
- Loan from the Small Business Administration
- Invoice factoring (the business sells unpaid invoices to a third party who fronts cash and then collects from the customer)
- Invoice financing (a lender uses unpaid invoices as collateral for a loan)
- Equipment financing
Hibernate the Business
Temporarily suspending business operations but keeping the business open at a minimal level might be an option, as an alternative to bankruptcy, if your business is suffering due to a cyclical downturn.
For example, if a new-construction electrician is getting less work because there is less new construction happening, that electrician might cut expenses drastically and continue to pay for things like business registration and the phone. As part of the business slowdown, they might give up any rented space, advertising, and supply contracts, and perhaps cut staff.
Then they could work for someone else, perhaps a residential electrician or a big-box store, for a time until market conditions improve.
Sell the Business
While it can be difficult to sell a business that is not turning a profit, it can be done, especially if the business has some intangible assets (intellectual property such as copyright, trademark, or patent) that a buyer will value such as your reputation, your customers’ loyalty, brand recognition, a great location, or a large market share.
Your business must bring some value to the buyer, even if it is currently running at a loss.
If for instance, your business is in a competitive market, a potential buyer might crunch the numbers and find that it would be less expensive to just start a similar business from scratch. This can be a great alternative to bankruptcy.
Selling the debt in addition to the tangible and intangible assets can be a challenge. Often debt restructuring is negotiated prior to sale, and the sale is contingent upon that.
Close the Business
As much of an emotional toll as this takes, sometimes business owners must throw in the towel. Signs that it is time to close a business include:
- The owner uses personal credit cards to keep the business going.
- The owner’s health and well-being suffer from stress.
- Key employees are leaving the business.
- The product or service is just not selling.
- “Hibernation” is not an option because there is no readily available alternative income stream.
In order to close your business, you will have to figure out how to liquidate business assets, pay creditors, lay off employees, close client or customer accounts, and wind up the tax year meeting all of the IRS’ requirements.
Regarding paying creditors and lenders: If there are no personal guarantees of the business debt, there is little they can do about not being paid or being paid less than what is owed.
If there are personal guarantees, the guarantor(s) may wish to consider filing a personal bankruptcy case to have that debt discharged. If the guarantor does not, he or she can be sued personally; this puts their assets and income at risk.
As a business owner, you know best which of these alternatives to bankruptcy might work for you. This will depend upon the type of service or product you offer and whether it is realistic to continue operations while waiting for the market to turn.
Not much is wasted except a bit of hope when you contact creditors and lenders and try to negotiate the amount of debt you owe or the applicable terms, or if you put your business into “sleep mode” for a while.
But if you’ve tried these tactics and are unsuccessful, you don’t see improvement in your market, you have considerable credit card debt due to the business, or you’ve personally guaranteed business loans you can’t repay, bankruptcy may be your only option.