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What Every Startup Founder Should Know About Bankruptcy

Did you know that statistics report that over 90% of startups fail and the average life of a startup is just 2 years? Don’t get discouraged, but it is important to get a reality check.

A start-up of any scale is dear to the founder. And if you are able to establish the business, nothing like it. But it is important to know before you begin that startups fail, and yours could do too. 

Knowing what causes emerging startups to fail is important as it could help avert that untimely end. This article also discusses what to do if your start-up fails.

What Exactly Is A Bankruptcy?

Basically, bankruptcy is a process, legal process, a startup can use if it is running into financial trouble. Filing a bankruptcy petition can help protect your bank account and your assets from creditors.

There are different types of bankruptcy petitions. Chapter 11 bankruptcy, is a mild form that is filed when you have money but are having trouble paying your bills and debts. 

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Chapter 13 is a more serious type, which is filed by those who have a lot of debt and do not have the means to pay it off quickly. Chapter 7 is kind of the in-between type of debt which is a way for people to file for bankruptcy without having to take too many drastic measures. 

Your bankruptcy attorney will be able to tell you which bankruptcy to file for depending on your financial situation.

What Happens When You File For Bankruptcy?

Well, filing for bankruptcy is not a small thing. It can have pretty serious consequences. For one, the business may not be able to continue operating. It will have to sell off a lot of its assets and repay any loans and debts it may have had with banks or other lenders. 

You will have to lay off staff and most importantly, the industry will lose trust in your company.

When Should You File For Bankruptcy?

Bankruptcy is an excellent way to get out of a financial mess but not everyone has to file for bankruptcy. Here is when you must file for bankruptcy:

  1. Your income sources and assets are not sufficient for your business to continue running.
  2. Your startup is in serious financial trouble and you cannot fix it through additional investments or refinancing.
  3. You are unable to pay the significant debts you have accrued.
  4. You are experiencing financial hardships due to the loss of jobs or health issues or other unforeseen conditions.

How Do I Avoid Bankruptcy?

Well, no one starts a business thinking they’d eventually end up bankrupt. You start it with the hope of earning more. 

But oftentimes your startup ends up creating more losses than profits. Here is how you can avoid bankruptcy:

1)  Market Research

Market research is the first thing any startup founder must do. There are numerous news articles, statistics, analysis firms, surveys, evaluations, etc. that can give you data regarding the product or service you are selling and what the market reactions to similar products are.  

You must also scope out the competition and how they are functioning. Ask yourself:

Does the competitor’s financials look good? 

Is this business future-proof?

Doing this research and planning properly before you enter the playing field is important.

2)  Managing Finances

Your aim as a business owner is to maximize profits. Having high expenditures is going to eat away at your profits and make the business unviable.

Managing financial resources is a very important part of sustaining a business. You must constantly monitor expenditure, income, investment, and other factors to take timely action to prevent any financial hardships.

Oftentimes, as a new business, you tend to spend unnecessarily on services or products that are not required or which can be acquired at a cheaper rate. Maybe you don’t need that expensive extravagant office space or the high-spec computers. 

Reflection on expenditure can help identify such instances and you can remove the unnecessary expenses and substitute the necessary ones with cheaper alternatives.

3)  Business Plan

You have made a business plan. Stick to it. Set monthly, quarterly and yearly goals and objectives and try to achieve them according to schedule.

Planning monthly activities and making a business plan can help you not only control expenses and finances but also improve efficiency and productivity. Plans can also track loans and debts and help you keep track of how much you need to and have already paid off.

4)  Unique Selling Point

What is it that brings customers to your business? What differentiates you from the rest? 

Having a clear-cut unique selling point that customers want can often help in bankrupt-proofing your business.

5)  Risks

As a business owner, there will be instances when you will have to take risks and take those blind leaps of faith. One of the biggest mistakes you can make will be to not take risks. The most important decisions in your startup will involve significant risks.

You mustn’t be afraid of making mistakes. You should be afraid of not taking risks.

6)  Prioritize Debts

Obviously, you must pay all debts. But there is a way to manage these debts and an order to pay off these debts. 

Some debts and loans carry a higher priority. Paying any tax debts must be your first and foremost priority. Then any payroll debts. And third, any bill that is older than two months.

7)  Borrowing Is A Skill

Don’t borrow more than you can pay off. Banks and lenders will try and sell more debt, but you must borrow only what you need according to the business plan you made. 

In some countries, if you are unable to pay off your debt, you may have criminal charges leveled against you. On the other hand, you must also not be afraid of borrowing in worry that you will not be able to pay it back. 

Borrowing too little can have a negative effect as you will not have the necessary capital to run your business. Like we said earlier, you must take some risks. Hiring a debt attorney can help you as they may advise you on how much to borrow and from where to borrow from. Oftentimes, they can also help you get lower interest rates.

What To Do When Filing For Bankruptcy?

Despite doing your best to support your startup, sometimes you have to face the hard truth and file for bankruptcy. The idea behind bankruptcy is to settle all debts by getting the debtors to pay as much as possible while still ensuring they can sustain their livelihoods.

The first thing you need to do is hire a good bankruptcy attorney. Your lawyer will take care of the processes for you. 

After the court hearing, the judge will decide how much of your assets will be sold off or given away and what the payment plan, often called a distribution, will be.

To Summarize

Most startups fail. There is no easy way of saying that. But cutting out unnecessary expenditures, regular monitoring of your finances, proper planning, and settling debts can help you avoid bankruptcy.

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