SMBs: How to avoid bankruptcy

Kristina: Even with the spotty economy, new small businesses are opening every day. What are the odds that a business will succeed?

Mark Ruiz, Rocket Lawyer On Call: While statistics about the failure rate of small businesses can be discouraging, the fact is that entrepreneurship can bring financial and personal rewards that one usually cannot obtain as an employee. That said, I encourage entrepreneurship and small business ownership because the potential for financial upside and independence is tremendous...the failure rates of any new venture are high, but if an entrepreneur is able to successfully pull it off, the rewards, both financially and personally are unparalleled.

Kristina: For SMBs who are struggling, at what point is it time to throw in the towel and either 1) close up shop or 2) file bankruptcy?

Mark: I believe that the point at which a person throws in the towel on a business depends on personal factors, such as ability to handle stress and risk tolerance. That said, in general, when a business is facing judgments due to debts or other liabilities that it cannot satisfy, that is usually a good time to consider closing down shop.

Kristina: What does bankruptcy mean for a company? For the owner of the business?

Mark: Chapter 7 Bankruptcy means that the Company liquidates in order to pay off creditors and generally shuts down. Under Chapter 11 Bankruptcy, the company will be reorganized under the supervision of the Bankruptcy Court and the owner can run the business as the debtor in possession for the purpose of paying back creditors. The logic is that the business is more likely to pay back creditors if it is kept intact as an ongoing operation, as opposed to closing its doors. If the business filing for bankruptcy is a corporation or another independent entity, the business Bankruptcy will not affect the business owner's credit. However, if the business is a sole proprietorship or the business owner personally guaranteed the debts, then discharging these sorts of debts through Bankruptcy can affect the owner's personal credit making it difficult to borrow in the future.

Kristina: What can new businesses do to give themselves the best possibility for success?

Mark: At the end of the day, the number one reason for business failure is poor financial management. It is always a good idea to keep monthly overhead as low as possible. Another issue is receivables management. A lot of businesses have trouble collecting on passed due bills which, in turn, makes it difficult for the business to meet its own financial obligations. Having a good billing and collections system in place can increase the probability of success. This might include enlisting the services of a billing company, or selling receivables when appropriate. Proper cash flow management substantially increases the probability of success for a small business. Sites like Rocket Lawyer can help business owners start off on the right foot by providing tips and insight to ensure they're taking the right steps toward protecting themselves.

Tags: Rocket Lawyer, small business, small business trends, SMB bankruptcy, SMB trends