There are a number of reasons a small business can fail. It might lack the capital necessary to continue; it may have bad credit relations; it may have an ineffective marketing strategy; or it could have piled on too much debt. It’s not easy to run a business. That’s why nearly half of all small businesses fail during the initial five years, according to the Small Business Administration (SBA). And it’s why, in 2014, 548,159 businesses were closed and 514,332 were started.
Post-2008 World
It has become exceedingly difficult to start a business since the financial collapse of 2008. This is partially due to the fact that it has become harder and harder to pay off debt, whether it’s personal or business-related. However, the catch-22 is that debt is a virtual necessity for businesses trying to get off the ground. Although, it should be noted, there’s some disagreement on this front. For more information on starting a business without debt, check out this Forbes article.
So how exactly does a small business deal with mounting debt? There are a number of things to keep in mind with regard to this issue.
The Ups and Downs of Credit Cards
You may have signed up for or want to sign for a business credit card to facilitate daily expenditures. For the most part, this type of credit card is not much different than a personal credit card. As you can imagine, if you keep up with your monthly payments, it can be a pretty awesome tool, yielding a number of benefits such as good credit. And having good credit can be super helpful as you expand your business. Of course, the flipside is that unexpected expenses might lead to missed payments, which in turn could lead to bad credit. And once you have bad credit, the snowball effect becomes harder to avoid.
Thus, it should be stated, it is very important to shop around and choose a business credit card that is right for your situation.
Preparing for Bankruptcy
If you’re currently amassing large quantities of debt, it’s a good idea to prepare yourself for bankruptcy. As a side note: there’s no need to panic at hearing the word bankruptcy. It’s not ideal, but it can salvage your business.
Secured Creditors
As you prepare for possible bankruptcy it’s important to understand the difference between secured and unsecured creditors. So what is a secured creditor? In certain cases, you may decide to collateralize loans using tangible assets. For instance, you might take out a loan using your house or your car as collateral, meaning if you default on the loan, the creditor (in this case the secured creditor) could seize the property. In such circumstances, we say the creditor has a lien on your property. Creditors having such liens are known as secured creditors.
Unsecured Creditors
What is an unsecured creditor? This type of creditor doesn’t have a lien on any property. Generally, credit card companies are considered unsecured creditors since they are owed money without the backing of collateral. In some cases, unsecured creditors can sue to obtain a lien on your property. In this way, unsecured creditors can become secured creditors in the eyes of a bankruptcy court. This is significant because the latter enjoys greater pecuniary protections during a bankruptcy case.
Maximizing Savings in Bankruptcy
It’s important to understand this distinction because depending on the type of bankruptcy you’re dealing with, the court might discharge some, if not most debts associated with an unsecured creditor. This could include medical expenses, credit card bills, certain lawsuit settlements and personal loans, to name a few.
In order to maximize your savings in a bankruptcy case, you might want to consider retaining an attorney with experience in this field. A skilled lawyer can sometimes persuade courts to discharge more debt than initially intended. It’s better to have a knowledgeable partner by your side as you face the stressful ordeal of handling debilitating debt.
