Starting a business is the biggest decision of an aspiring entrepreneur. However, the entrepreneur needs to go through a tumultuous journey to bring life to his business. While repaying business loans and providing quality products/services, it is not easy for an entrepreneur to maintain good financial health. Fluctuations are natural for every business, especially the new ones. Most importantly, new business owners are not savvy in negotiating with their multiple creditors. They are not financially prudent, and in some cases, emotions affect their decisions. Ultimately, they find the debt amount increasing day by day. It can result in bankruptcy filing.
Ways to avoid bankruptcy
Filing for bankruptcy is the last resort of every business, and the entrepreneur is bound to shut down his business due to bankruptcy. Thus, before establishing a business, you must know how to prevent bankruptcy. You should also learn about the bankruptcy law in the United States. Professional attorneys have presented you with some options to avoid bankruptcy.
1. Create a debt management plan – Repay debt on time
While starting a business, entrepreneurs need to secure loans for different purposes. Financing is good for a business setup. But, you must track loans and focus on debt repayments.
Debts can be of 2 types- Unsecured and secured. The secured one involves collateral. When you cannot pay back the amount, your assets will be the solution. On the contrary, there is no collateral backing with the unsecured debts.
Thus, you have to prioritize your debts and repay your secured debts first. Especially, the debt with a higher interest rate must be your major focus.
While repaying unsecured debts, you can try to make at least small payments regularly to avoid debt build-up. Moreover, you have to be aware of your timely payments of necessary bills. It is also better to contact debt consolidation to manage piles of debts.
2. Track your financial documents
Track your important business-related financial documents and focus on bookkeeping. It is one of the important ways of avoiding bankruptcy.
You have to keep your employee records, learn about potential business costs, and track other documents. It will prevent you from overlooking the amount you owe your creditor. You have to keep your business organized and avoid any potential future issues.
However, how will you achieve this goal? You have to create your business plan, as it is important for every startup. You need to decide on your business strategies, which reveal your budgets, cash flow, and objective. But, you must adhere to your written business plan to keep away from bankruptcy.
3. Never take a high amount of loan
It is not easy to decide on the right amount of loan for your new business. You may check your savings to deal with a business project. Financial institutions and banks may try their best to sell loan products. However, while the economy shrinks, you can face the risk. It may also result in criminal penalties due to the failure to repay the loan.
Based on the nature of your business, you have to calculate the right loan amount. Moreover, you have to ensure that you will receive a high ROI. Focus on the monthly payments, monthly installments, and loan terms before applying for the loan. Create an estimate of the profits and deduct the amount you need to repay for loans.
4. Pay attention to cash flows and money collection
One of the major factors for pushing your business forward is the cash flow. During the first few years of your business, some customers may like to purchase your products in installments. But, for any reason, when you cannot collect the money from your customers, you may not be successful in your project. That is why you can rely mostly on cash-based sales during the initial years of your business. While you are successful, you may be lenient in your sale terms and deal with your trusted customers.
However, there may be several reasons for the failure of different companies. Internal conflicts, wrong strategy, and absence of market interests are some common factors resulting in bankruptcies. Try to avoid these things and prevent bankruptcy.
5. Provide high-quality products and services
Quality of products and services is the most important factor to make a difference in the business profit. Learn about your customers’ anticipations and maintain the best quality standards. Your products need to be more cost-effective and better than your competitors’ products. When you cannot fulfill your sales targets, you cannot repay your loan. Thus, create the authentic product and provide reliable services.
6. Contact your lenders regularly
You have to respond to your lenders’ requests for relevant information. While you have missed a payment and cannot repay the loan on time, your lenders will send a warning signal.
When your lenders do not get any response from your side, they will ask you about the reason for the late payments and missed payments. You may also try to readjust your repayment model and loan terms by negotiating with your lenders.
7. Sell some business not necessary to you
You may have a fax machine you have not used for years. Or, you may have a warehouse without any stock. Sell these items to repay your loan. Based on the size and type of your business, you have some assets that you do not use.
8. Look for debt settlement companies
Your monthly loan repayment amount may be more than 20% of your earnings. The debt settlement company will make a decision based on the severity of your problem and your potential to overcome it. When is debt settlement the right choice for you?
- You can negotiate with your creditors.
- Your creditors agree to minimize your debt burden.
- You have a stable income, and you will be able to continue paying your loan based on the debt settlement scheme.
These are some tips on how to avoid bankruptcies. Your credit report will show your bankruptcy filing for 10 years. Thus, you must take the right step to prevent bankruptcy.