MBT | McKay, Burton & Thurman, P.C. | Attorneys At Law

Top reasons that businesses face bankruptcy

On Behalf of | Apr 11, 2023 | Bankruptcy Law, Business Law

When businesses face bankruptcy, people sometimes assume that it’s because the business owner must have made poor financial decisions. Maybe they invested too much of their money without any return. Perhaps they took out ill-advised business loans with high-interest rates.

It’s true that these types of things do happen. But it is very common for outside pressures to cause the need for bankruptcy. These are things that may be almost entirely out of the business owner’s control. They haven’t put themselves in this position, intentionally or even negligently. How could this occur?

Changes in the market

One thing that happens is that economies tend to be cyclical. There can be a rapid expansion, during which the market seems very robust. This could be followed by a decline that turns into a recession. In particular, recessions are very detrimental to businesses because consumers have to find places where they can save money. This means having to pick and choose where they’re going to spend, and they may have to skip purchases that they otherwise would’ve wanted to make.

In other words, the goods and services that the business offers may be excellent, there may be a market for what is available and the prices may be completely in line with the value. But if consumers don’t have money during a recession, none of that matters.

Cash flow issues

Another thing that can happen is that spending doesn’t necessarily line up with income. Maybe an order was placed and your business invested money to buy the parts and materials that were necessary. But the buyer didn’t send the funds for that purchase on time.

If they are late, then how could that business pay its employees? What if the buyer fails to pay entirely? They may have violated a contract or a handshake deal, but the fact of the matter is that the expected income no longer exists and the debts remain. Again, this may not actually reflect on the business itself or the quality of its products.

What options do you have?

Business owners who are trying to figure out a solution to a financial crisis need to know about all the legal options at their disposal. Working with an experienced legal professional can provide that clarity.