Once you start your own small business, the thought of bankruptcy immediately replaces any lingering childhood fears. The boogieman, monsters in the closet, and things that go bump in the night pale when compared to fear over one’s financial failure.
Bankruptcy can feel like the kiss of death. Like most of our fears, though, bankruptcy isn’t quite as bad as it first seems. Yes, it’s real and it’s scary. But it’s something you and your business can overcome.
The Disadvantages of Small Business Bankruptcy
Filing for bankruptcy puts a serious dent in your credit history, and it stays there for ten years. Ten years after you file, it still sits there on your credit report for everyone to see. That essentially means you shouldn’t plan on getting a small business loan in the near future.
Bankruptcy can also cause potential business partners to stay away from you. They also fear that kiss of death, and they want nothing to do with it. In today’s information-rich world, potential partners definitely do their research. Once they see the bankruptcy on your credit report, they’ll probably turn your offer down.
Small Business Bankruptcy Isn’t Always the End
Obviously there are some pretty bad things about bankruptcy. Most small organizations file for Chapter 7 bankruptcy, which means the business’s assets are liquidated to repay debts, and the business usually ceases to exist at this point.
Even if your business goes under, you don’t have to consider it the end. Learn from your mistakes, go back to the drawing board, and start a new business that actually works. If everyone succeeded on their first try, then owning a small business wouldn’t take guts.
Chapter 11 bankruptcy, however, lets your small business continue, as long as you can make a detailed repayment and restructuring plan showing how you will get out of debt. In other words, bankruptcy for a small business isn’t always the end. It can help you avoid harassment from your creditors, while you take a step back, and reorganize your business plan.
Chapter 11 bankruptcy only applies to corporations, sole proprietorships, and partnerships. The individuals who own corporations don’t usually have to worry about how a small business bankruptcy will affect them personally.
Sole proprietorships and partnerships, however, can have direct ties to an owner’s personal finances. Understand that filing for Chapter 11 bankruptcy, therefore, could impact your personal credit history as well.
Light at the End of the Tunnel
The good news is that the negative effects of bankruptcy won’t last forever. Even though it stays on your credit report for a decade, it starts to lose significance after a while, especially if your business has turned things around, repaid its debts, and built a better financial reputation.
It’s much more than a waiting game. You can actively recover from bankruptcy by taking better control of your business’s finances.
Consider this: Trump Enterprises has filed for bankruptcy three times. You don’t see Donald Trump hiding in fear. That’s because bankruptcy is largely there to help businesses and individuals who need protection.
It can seriously hurt your small business, but there is a light at the end of the tunnel for those who are willing to take a serious look at their business plan, and make the necessary changes.