The Most Common Causes of Small Business Bankruptcy

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small business bankruptcyThere are some alarming — make that terrifying — small business bankruptcy statistics floating around the web that claim that the vast majority of small businesses don’t make it to their first birthday party. Thankfully, this isn’t the case. However, it’s not as if the truth is inspiring, either: just over 50 percent of small businesses fail within the first four years.

Naturally, a small amount of this failure is the result of tragic events like severe illness or death. But a far more sizable proportion of small business bankruptcy cases are triggered by the following:

  • Not having sufficient capital. This common problem can erupt due to unexpected costs (e.g. damage due to natural disasters), or arise because of a failure to exploit time-limited opportunities (e.g. not expanding into a profitable marketplace ahead of competitors).
  • Not clearly understanding the marketplace. This manifests in several different ways (and often all at the same time), such as: improperly pricing products/services, failing to differentiate from competitors, and targeting available but ultimately unprofitable customers (this is a particularly frequent pitfall for B2B businesses that get stuck with “gatekeepers” instead of decision-makers!).
  • Overgeneralizing or needless specialization. The former happens when a business essentially loses sight of its core strengths, and starts selling products and services to generate revenue in the short-term, but at a cost of eroding its competitive advantage and brand equity in the long-run. The latter happens when, ironically in an attempt to find a safe and secure marketplace position, a business leaves legitimately profitable business lines on the table in pursuit of commanding a vertical that, frankly, doesn’t exist (i.e. specializing in only selling protective cases for Apple products vs. devices from other manufacturers).
  • Unexpected growth that leads to over-expansion. While not having enough demand is obviously a fundamental problem, having excessive demand can be even more problematic if it convinces business owners to expand too fast, too soon. Indeed, many business owners that were thriving with one or two locations discovered — to their financial dismay — that scaling that success was far costlier and more complex than they anticipated.
  • Failing to adapt. While it’s not a good idea for businesses to pivot their vision on an annual basis, there comes a time in every business where it must adapt and evolve — or else face extinction. Knowing when this inflection point is, and also knowing which way to shift, determines whether a business’s best days are behind or ahead.
  • Inadequate or incompetent leadership. This can be especially fatal in a small business, where usually not a week (or sometimes even a day) goes by without a mission-critical decision to make, such as whether to bid on a proposal, whether to change a major supplier, whether to invest in new technology, and so on. Improper (or non-existent) succession planning can also put what was a once very successful business on the fast-track to a small business bankruptcy.

Learn More

If your small business is facing an unsustainable debt situation and your creditors are unwilling to be reasonable and negotiate, then filing for bankruptcy may be fiscally sensible. Depending on your situation, you may be able to file for chapter 11 bankruptcy and keep your business operational as you execute a court-approved restructuring plan. Or if this isn’t advantageous or viable, you may be able to file for chapter 7 (“liquidation”) bankruptcy, which would immediately entitle you to important legal protections.

To learn more, contact the Law Office of Charles H. Huber today. We have been helping businesses file bankruptcy cases for decades. Our experience is your advantage!