The basic cause of business bankruptcy is typically that the debt level it is carrying is unsustainable. Chapter 11 bankruptcy, for instance, allows a business to reorganize this debt into an affordable repayment plan so that it can continue operating. Chapter 7 liquidates assets to pay off the debt.
Why do businesses find themselves in this position in the first place? There are many different potential reasons to consider.
Changing economic conditions
First, economic conditions can shift, which is outside of the business’s control. For instance, perhaps the company does well at first, as many consumers are interested in the products or services. But an economic recession means that people don’t have as much to spend, so the business sees its revenue decline sharply.
Additional competitors
Another issue that sometimes arises is that a business will do well if it’s the first one addressing a specific need in that geographical location. But if other competing businesses come into the area, there may not be enough of a customer base to support them all. The debt that the business had, which at first looked perfectly affordable, is suddenly too much to make those monthly payments.
Business management skills
Finally, in some cases, business owners find that running the company takes a different skill set than they initially had. Say that someone is an inventor and comes up with an innovative new product. This could cause them to start a small business to sell that product, but managing the financial side of a business is much different than product development.
When business owners find themselves facing debt that they can’t afford, for these reasons or any others, they need to understand what steps to take. Having legal guidance helps.