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

4 signs a small business might need to file for bankruptcy

On Behalf of | Apr 4, 2024 | Bankruptcy Law

Small businesses often run on a tight budget with very little wiggle room. They count on being able to have a consistent income that covers expenses and provides a living for their owners.

Ultimately, many small businesses end up having to shut down. Approximately 20% close in the first year. That increases to around 30% by the end of the second year in business. And, most small businesses, 70%, close within a decade of opening.

For some small businesses, bankruptcy provides them with a way to address debts and potentially remain open. Learning the signs that a small business is struggling in ways that debt relief may help to resolve can help owners to determine whether they can adjust or if they could benefit from filing for bankruptcy.

Persistent cash flow issues

A company that’s struggling to keep up a positive cash flow is a sign that something’s wrong financially. When a business consistently spends more money than what’s coming in through sales, covering operational costs might be difficult or impossible.

Increasing debt

A business that continually has an increase in debt or relies on credit to cover daily operating expenses is in trouble. Eventually, it becomes difficult to break the debt cycle because it’s consistently chipping away at the company’s profitability.

Difficulty paying bills and salaries on time

Struggling to meet regular financial obligations, such as paying bills, rent, or salaries on time, indicates a severe liquidity issue. This not only affects the business’s creditworthiness but can also erode trust with employees, suppliers, and customers.

Declining sales and revenue

A consistent decline in sales and revenue over an extended period is a red flag. This trend could be due to increased competition, market saturation or decreased demand for the business’s products or services.

If a business owner determines that their company is in financial distress, it’s best for them to review their options for recovering as soon as possible. One of these might be filing for bankruptcy, and consulting with a legal representative may help them to determine how to move forward.