Entrepreneurs: Use These Five Strategies To Reduce Your Risk Of Bankruptcy

Larry Alton

Some people say bankruptcy isn’t the end of the world, and for most business owners, that’s true. Business owners routinely bounce back from bankruptcy and find ways to reestablish their business without relying on credit.

However, if you’re an entrepreneur who relies on credit to run your business, bankruptcy can set you back significantly. Here are a few ways to reduce the risk.

1. Realize that bankruptcy can happen to you.

The first step to reducing the risk of bankruptcy is to recognize that it can happen to you. When you acknowledge the possibility, you’ll be more likely to take the necessary precautions outlined in the following strategies.

2. Acknowledge the financial and emotional consequences of bankruptcy.

There are long-lasting financial consequences that follow bankruptcy. There are also emotional consequences. For instance, if bankruptcy causes you to lose your assets and go out of business, it might also squash your motivation to rebuild your business. Even if you are motivated to rebuild your business, it’s going to be a struggle to source enough capital without access to credit. You’ll need to start small and work your way back up from scratch.

The long-term financial consequences can be devastating. A bankruptcy will remain on your credit report for many years, during which time you’ll need to find alternative sources for capital.

If you’re in the U.S., keep in mind that both Chapter 7 and Chapter 13 bankruptcy will impact your credit long-term.

Instead of eliminating debt, Chapter 13 bankruptcy establishes a debt repayment plan. This type of bankruptcy stays on your credit report for only seven years. Chapter 7 bankruptcy can eliminate old income taxes, utility bills, and credit card debt. However, as a consequence of debt elimination, Chapter 7 will remain on your credit report for ten years.

You don’t want to spend a decade struggling with obtaining capital for your business. Allow this potential consequence to motivate you to make wise financial decisions and avoid the problem entirely.

3. Hire an accountant or other financial professional

If you’re like most entrepreneurs, you want to do everything yourself, including financial management. While many entrepreneurs are successful at running their business, finances are a risky DIY endeavor.

The simple truth is that 96% of businesses fail within the first ten years because they can’t pay their bills. Many businesses struggle to pay their bills because they don’t manage their cash flow properly. To avoid falling into this category, hire an accountant or financial professional to manage your company’s cash flow. Unless you’ve studied financial services, you could probably use some help in this area. This is nothing to be ashamed of. As an entrepreneur, you deserve to spend your time focusing on your strengths and leave other tasks to other experts.

4. Listen to people who have bounced back from bankruptcy.

Business owners who have bounced back from bankruptcy have plenty of wisdom to share about what they did wrong and what they’d do differently.

For some valuable tips and inspiration, check out the stories of these three millionaire entrepreneurs who went bankrupt and made a full recovery. One entrepreneur rebuilt his real estate business without borrowing from banks and used a secured credit card to rebuild his credit. Check out their stories to learn how they each got their businesses back on track.

5. Avoid being overconfident.

There’s nothing wrong with being confident about your abilities or potential for success. You’ve worked hard to build your business no matter what stage you’re at, and there’s no doubt you can create a successful business. The difficulty is knowing when you’re being overly confident and missing the signs of trouble.

Overconfidence tends to mask the signs of trouble because it keeps you believing nothing is wrong or that everything will work itself out. Make sure you’re handling issues as they arise – especially financial issues – and not leaving anything to chance.

Have you formed a legal business entity?

Sometimes bankruptcy is unavoidable despite your best efforts. Establishing a legal entity for your business will protect your personal assets in case your business needs to file for bankruptcy. For instance, in the U.S., forming an LLC, a C-Corporation, or an S-Corporation will protect your personal assets from being used to pay creditors during a bankruptcy.

If you haven’t formed a legal entity, now is a great time to get that ball rolling. You don’t want to be in a position where you have to rebuild your business and your personal life at the same time.

For more SMB strategies, read 4 Ways Data Analytics Can Make A Small Or Midsize Business.

About Larry Alton

Larry is a freelance marketing & technology consultant with a background in IT. Follow him on Twitter @LarryAlton3.