Every entrepreneur launches a business with confidence it will succeed. Unfortunately, not all do. The Small Business Association (SBA) reports that three out of 10 small businesses fail within the first two years; half fail within the first five years and more than 6 in 10 (66 percent) fail within 10 years of opening.
Bankruptcy is a crushing blow to a small business operator, but the good news is research shows there is life after a business bankruptcy. In fact, a study for the U.S. Small Business Administration found that many small businesses that file bankruptcy ultimately grow into thriving businesses.
That’s how it is supposed to work. The purpose of the U.S. bankruptcy code is to provide businesses (and individuals) a fresh start so they can rebound from financial trouble and right the ship.
- Chapter 7 bankruptcy liquidates your business and erases most of your debt.
- Chapter 11 bankruptcy allows a business to remain operational while you work with a trustee to repay creditors over a certain period. It is a complex process that is only right for a select group of businesses.
- Chapter 13 bankruptcy is reserved for sole proprietors who are also filing for personal bankruptcy.
Rebounding from Bankruptcy
It is possible to rebound from any of these three bankruptcies. Here are some tips to help you do so.
Repair your credit – There is no way around it, if your bankruptcy included a personal bankruptcy, your credit score will take a hit. Make sure your bankruptcy is accurately reflected on your credit reports and begin rebuilding your creditworthiness by staying current with creditors.
Negotiate New Vendor Contracts– If you maintained good relationships with vendors during your bankruptcy, they may be willing to continue working with you, albeit with some new provisions or restrictions. If you are establishing new vendor relationships, it is a good idea to start with smaller vendors, advises Jared Hecht, CEO and co-founder of Fundera, an online loan broker for small businesses. “A fellow small business owner will be more likely to empathize with your situation and give you a chance,” he explains.
Don’t count out financing – It may come at a higher rate than it would without your bankruptcy, but it’s not impossible to get. Hecht recommends considering alternative forms of financing, such as a secured credit card, short-term loans or peer-to-peer lending.
The Important First Step
Rebounding after a business bankruptcy requires getting through bankruptcy efficiently. When your financial future feels uncertain, enlisting the assistance of an experienced bankruptcy law firm that can provide a candid assessment and recommend an effective course of action is one of the most important investments you can make.