What to Do If Your Business Is in Distress
Increasing costs and rising interest rates have impacted many businesses. If your business is in crisis, there are steps you can take that could improve your business’s financial condition and help it successfully move forward. Entrepreneurs are competent, but they cannot do everything on their own. There comes a time when a business owner needs to ask for help from a team that can provide counsel and services to help them overcome their financial distress.
If your business is headed down the wrong road, there are a variety of actions you could take to improve its prospects for future success, including the following:
Increase revenue and lower costs. Cash flow is a common reason small businesses fail. Cash flow refers to the money that goes in and out of a business. Improving cash flow involves addressing both sides of the equation by improving business performance and increasing revenue, as well as better budgeting and more careful inventory management. An accountant can be invaluable for identifying cash flow problems and proposing solutions.
Renegotiate contracts. Unfavorable contractual terms can eat into your bottom line and make it difficult to correct your business’s course. A business attorney can review vendor, employment, and other types of contracts to identify terms that could be renegotiated to improve your business’s cash flow.
Look for additional capital. High interest rates make it difficult for small businesses to afford loans, but there are other ways to inject new capital into a business, such as equity financing, angel and private investors, crowdfunding platforms, peer-to-peer lending, venture capital funding, business incubators and accelerators, and grants. You should also try to clean up your finances and improve your business credit score to qualify for a lower borrowing rate.
Refinance or restructure debt. If debt is dragging your business down, you should consider refinancing or restructuring. Refinancing involves taking out a new loan to pay off existing debts or combining multiple debts into one; restructuring entails adjusting existing debt terms. These strategies can free up cash for a business by providing better loan terms and reducing monthly payments. Keep in mind that this is only helpful if you can get a better interest rate or repayment terms and are not subject to sizable penalties.
Sell assets or part of the business. Growing businesses often acquire assets and expand into new markets or segments. A struggling business could do the opposite, selling off assets or parts of the business to stay afloat. This may require refocusing on the core business goals that the company was founded to achieve.
Bankruptcy. Bankruptcy does not mean admitting defeat. It can be a way for a distressed business owner to reorganize their debts and get back on their feet. The Small Business Reorganization Act of 2019 introduced Subchapter V to Chapter 11 of the U.S. Bankruptcy Code, giving businesses a simpler, more cost-effective bankruptcy option that has grown in popularity.
Bankruptcy—whether a Chapter 5 or 11 reorganization or a Chapter 7 liquidation—should be considered a last resort after all other options have been exhausted.
Before you consider bankruptcy, talk to a business attorney, an accountant, and a bank or other financial institution about your options to improve your business’s chances of moving beyond its current difficulties. There may be ways to raise money, introduce revenue streams, and reorganize debt that have not occurred to you.
Contact our attorneys today to start assembling your small business rescue team.
