SMALL BUSINESS BANKRUPTCY CAUSES

2007-03-08 10:33:40

( Financial )



Small business is integral to the economy of the United States. It contributes to employment generation as well as product innovation. The robust economy of the United States is partially due to the entrepreneurial abilities of average American who decided to put up small businesses. Small businesses contribute largely to the gross domestic product of the country.

High incidence of small business bankruptcy is posted every year in the United States. Failure of small business operation is a reality in entrepreneurial activities. However, closer look at the causes of small business bankruptcy reveals that proper planning and efficient management can avoid bankruptcy.

What are the main causes of small business bankruptcy?

Lack of Enough Capital

Many small business owners do not know where to source funds for their operations. They are not aware where to take up loan at a lower rate and good repayment terms. Most entrepreneurs do not know how much capital they need before their businesses earns profits. Thus, small business bankruptcy occurs in the middle of the operation of the business due to insufficient capitalization.

Banking institutions are very strict in the income projections of small business as well as cash flow projections to determine the profitability of the business. It will also help them assess the ability of the business to pay back the loan it will source from them. However, lack of proper projections on the profitability of the business as well as being a start up business deters small business owners from getting financing from banks.

Lack of Planning

Lack of planning is a major reason for small business bankruptcy. Small business owners forgot to take into consideration the demand for their products and services to ensure revenue for the business. Planning also entails selecting a good location for the business to capture market demand as well as placing the right people to manage the day to day operations of the business.

Capital calculation is also an aspect important in planning the operations of the business. It is crucial to determine the exact amount of capital that the business requires to avoid undercapitalization particularly if demand for the product is already determined.

There are alternatives to bankruptcy that small business owners can employ than file for bankruptcy. These alternatives will help the business owners in managing financial debt as well as provide a potential to revive their business. It’s just a matter of seeking proper advice from people who are familiar with the legal process involved in restructuring small business bankruptcy.


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