How to Avoid Business Bankruptcy with Financing

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Why do businesses go bankrupt?

As a business owner, the thought of bankruptcy can fill you with fear and panic, especially when the economy is struggling or your company is facing tough times. the fact is, 20% of new businesses fail in their first year, and only a small percentage stay long enough to become an institution.

So why do these businesses go into bankruptcy? And just as important, how can you avoid making such a costly mistake? Keep reading to learn how to get started with four of the most common reasons small businesses fail:

1. incomplete business plan – A good business plan is much more than just an idea in your head or a piece of paper that is required by investors or lenders. Your business plan is your data-backed roadmap that keeps you focused and on task when distractions fly away. It should include details about potential obstacles to the business, including market competition and financing needs, as well as a formal plan for the organizational structure and income sources of the business. Entrepreneurs who have a proper business plan are more likely to avoid bankruptcy in their early years because they have planned ahead, understand the market and competition, and therefore have the ability to respond well to adversity. Better chance.
2. inaccurate financial records Small businesses that have incomplete bookkeeping and accounting procedures are most likely to fail in the first year. Without the proper tools to financially plan for operating expenses and loan schedules, business owners risk defaulting on current loans and being unable to meet future obligations.
3. rapid growth Expansion, whether physically or financially, is often the goal of entrepreneurs. However, expanding your business before the current financial situation is stable can lead to financial ruin. If the priority is to increase annual revenue, it is important that business owners make educated, well thought-out decisions about securing additional capital through expansion, renovation and debt.
4. no marketing strategy New businesses need customers and revenue to be successful. However, most types of businesses must implement some marketing and advertising. strategies To attract new customers. Companies that have a documented marketing plan are more likely to avoid bankruptcy due to declining sales revenue or net income. Whether it’s through social media marketing, creative signage, or television commercials, marketing is essential.

How to assess the financial health of your small business

One way small businesses and non-profit organizations differ from large corporations is the flexible financial reporting requirements. While publicly traded companies and large corporate entities are required to publish their company financial statements quarterly and annually, many small business owners and startup entrepreneurs prepare or use an income statement, balance sheet or cash flow statement. Goes on for a long time without reviewing. When running a business this way if something goes wrong, you might not know about it until it’s too late to do anything about it.

One of the best ways to avoid a financial crisis like bankruptcy is to take care of your financial health. In addition to reviewing financial records and understanding your business’s bottom line, there are several financial metrics that can be used to quickly gauge financial health.

gross profit margin

Gross profit margin measures a company’s financial health in terms of profitability. Gross profit margin is calculated by subtracting cost of goods sold (COGS) from net sales. Any profit measured indicates that the business is making more than it costs.

Gross Profit Margin = Net Sales – COGS

revenue growth rate

The revenue growth rate compares current revenue to prior periods. The revenue growth rate is found by subtracting the current period’s revenue from the revenue for the same period last year and dividing the difference by the prior period’s value. A positive percentage indicates a successful business.

Revenue growth rate = Revenue of previous period – Revenue of current period

Debt-to-Income (DTI)

The DTI calculator helps small business owners and lenders understand what portion of business revenue is being used for loan payments on loans, lines of credit and other financial liabilities. Ratio measures bankruptcy, by evaluating whether the business can pay its bills. Small business owners can evaluate their DTI to gain insight into making decisions about funding options, expansion and staffing.

DTI = Recurring Monthly Loan Payments / Gross Monthly Income

Operating Strategies to Avoid Bankruptcy

If assessing your finances has you worried about the future of your business, there are steps you can take before reaching out to a bankruptcy attorney or finding another job. Consider talking to your current lenders to arrange a modified loan repayment or working with a management consultant on business restructuring. There are also several credit counseling programs offered by both lenders and law firms that can help entrepreneurs avoid Chapter 7 or Chapter 11 bankruptcy. Some more direct actions you can take today to change the course of your financial health include:

• spend down Cost cutting will result in more free cash flow, allowing the business to focus on paying down debt and increasing working capital. Some ways to reduce operating expenses include canceling unneeded subscriptions and software licenses, postponing large purchases, laying off staff members, and monthly renegotiating contracts with vendors and suppliers. Contacting providers and sharing your situation is a great way to get a repayment plan for recurring costs like utility bills.
• increase revenue – Creating a strategy to increase revenue ahead of tough times is the best defense against unexpected revenue. Whether your small business provides goods or services, some ways to increase revenue include running a special program on gift cards, recycling old inventory and selling it at a discounted price, and offering reduced service rates for existing customers. This includes those committed to long-term contracts. ,
• collect receivable Over time, unpaid invoices may start to pile up, which causes an increase in accounts receivable. Collecting unpaid accounts receivable is a smart way to increase cash flow and avoid liquidation. For customers who can’t pay the invoice in full, consider offering a payment plan and setting up recurring payments for agreed monthly payments. Another option is to offer discounts to customers who are willing to settle their debts quickly.

Financial Strategies to Avoid Bankruptcy

There are several financing options to consider before filing bankruptcy, including credit counseling and debt consolidation or restructuring. If your business is making very high monthly payments to lenders, refinancing with a new lender can be a good option to reduce your monthly liabilities and improve your credit worthiness. If your business lacks the funds needed to launch a new marketing campaign or buy inventory in bulk, a line of credit or term loan may be the best way to get funding fast.

Each type of small business loan has different loan terms, eligibility requirements, interest rates, and funding methods. Before approaching a lender about business financing to avoid bankruptcy, get a better understanding of your options by preparing the following items:

• desired loan amount
• Revised Business Plan and Budget
• financial statement
• Two year business income tax return
• Personal credit report and business credit history
• Current Debt Settlement Schedule for Business Loans and Personal Loans
• List of business and personal assets

Once you’ve gathered some documentation and have a better understanding of both your business’s creditworthiness and your business needs, choose a lender to work with. Traditional lenders, such as banks and credit unions, offer low-interest, long-term loans to businesses with excellent credit scores. Alternative lenders, such as Biz2Credit, may offer multiple loan programs, an easy online application process, and flexible approval requirements. Once you’ve decided on a lender or narrowed the list down to a few, consider the following financing options as a way to raise capital and avoid bankruptcy.

Term loan

Term loans are a traditional type of financing where borrowers receive a lump sum payment and repay the loan over time with monthly payments. Long-term loans may be appropriate for larger loan amounts or for very large purchases such as commercial real estate. Short-term loans are common for small business owners who need additional cash flow to pay operating expenses, implement growth strategies, or offset seasonal revenue fluctuations. Term loans can be secured loans, where they use the borrower’s collateral to reduce the risk to the lender. This is beneficial for business owners who want low down payments or high loan amounts. Term loans usually offer lower interest rates and better repayment terms than other types of fast-funding loans.

sba loan

SBA loans are a type of loan program where US Small Business Administration Each small business guarantees a portion of the loan. There are several programs through the SBA including the SBA 7(a) loan program and SBA microloans. Eligibility requirements for SBA loans typically require a high credit score and at least two years in business, and the approval process can take up to 30 days. For entrepreneurs who may qualify and wait for funding, SBA loans offer a great, low-interest financing option.

business line of credit

A business line of credit is a type of revolving credit that works similar to a business credit card. When a borrower is approved for a credit line, a maximum credit limit is also approved. The borrower can then draw on the credit line any time he needs cash for his business needs. Monthly payments are made up of principal and financing costs calculated according to the annual percentage rate (APR). When the balance is paid off, the funds can be accessed again.

equipment financing

Equipment loans, or equipment financing, are used by small businesses to purchase equipment or machinery, including computers, computer software, vehicles, construction equipment, commercial kitchen equipment, office copiers and others. fixed assets, The equipment purchased serves as collateral to secure the loan, so equipment financing is a great option for borrowers with bad credit or bankruptcy. The eligibility requirements for an equipment loan consider the value of the asset, the useful life of the asset and the creditworthiness of the borrower.

merchant cash advance

A merchant cash advance (MCA) is a fast-funding option for entrepreneurs who collect credit card revenue and need to avoid bankruptcy. When approved for an MCA, borrowers receive a one-time payment and repay the loan and financing fees using future credit card or debit card sales. MCA financing costs are higher than other types of financing, but borrowers with credit scores above 525 can usually be approved if their business has been in operation for 18-24 months.

ground level

Running a business can be a very rewarding and challenging task. It is important for business owners to know where their business stands financially by regularly reviewing financial reports and financial metrics such as DTI. If you suspect your business is in trouble, consider refinancing existing debts or seeking credit counseling before filing for bankruptcy. There are also several financing options, such as a term loan or line of credit, that can be used to avoid bankruptcy. Contact Biz2Credit today and ask about ways your business can pay off high-cost loans as this New York City IT consultant did with a $100,000 line of credit.