5 Reasons Why Businesses Go Bankrupt

Businesses Go Bankrupt

Every company needs income and steady revenue to survive in the market. If a business does not stay profitable for an extended period, the owners might just be preparing to file for bankruptcy. Loss of income is not the only reason businesses file for bankruptcy, although they are one of the most common. 

In this article, we will be discussing some reasons why businesses go bankrupt:

Poor Income

A common problem for most small businesses a poor cash flow. The term refers to the timing of your business getting paid and handling bills. It doesn’t mean the business has no income. 

For example, let’s say your business received a $100,000 order. The order costs you $70,000, so your profit is $30,000.

A poor cash flow is when your materials supplier requires you to pay the order in full in 30 days, but your client pays you the total amount in 60 days. It means your business is still making money; however, it’s poor in repaying its bills.

It’s often a regular occurrence in small businesses, especially seasonal ones since their products are only profitable in a specific season. Examples of this are Christmas decoration manufacturers, Halloween gifts shops, etc.

Trouble Finding Financing

Even though there are many business financing options in the market, it doesn’t mean you can quickly get one. Finding loans is one of the primary problems businesses face, especially startups. Not many are keen on lending new businesses money. 

 One of the most common sources of business financing is business loans. Most of them need business credit, and if your business doesn’t have established credit yet or has poor credit, lenders might be apprehensive about approving. However, there are several lenders out there that offer bad credit loans for businesses. 

If your business can’t secure business financing, it will struggle to stay afloat, and filing bankruptcy might be coming soon.

Poor Decision Making

As a business owner, you need to be level-headed by thinking logically and carefully. With a lack of planning and hasty decisions, a business can fail. For example, a business invests money in developing a product without consulting its clients and the market. It’s poor decision-making because even if that product gets finished, it won’t take back its cost since no one is willing to buy it.

So lack of education and experience in finance and marketing are just some reasons for poor decision-making. Yes, no company is immune to making mistakes, but some of them can recover through planning, and if you’re not good at that, your business might go bankrupt soon.

Lack of Demand For The Product Or Service

The most common reason for business bankruptcy is a lack of demand for the product or service. It can be due to changes in consumer tastes or technological advances that make the product or service obsolete, or simply a change in the economy that results in fewer people having disposable income. 

When demand for a product or service declines, businesses have to either find a way to cut costs or raise prices and often, they are unable to do either in a sustainable way.

Excessive Borrowing

With constrained credit, a business might lean on borrowing loans based on future revenue. However, you must ensure that your business can pay up when the time comes. 

Borrowing excessively can put your business in a risky position, and if it slips up in terms of payment because of a season of dry spell, your business is in big trouble financially. 

You need to prepare ahead of time within your company for cash to make up for a temporary downturn in sales. But again, the best way to avoid this situation is not to borrow excessively. It can cause a lot of vulnerabilities to your business. It’s especially true for seasonal businesses that often experience a downturn in sales due to seasonal products. 

Most of the time, these businesses are only profitable in a single season yearly, which is why bankruptcy is very common in their industry. However, they can go back from bankruptcy and have their business go running again.

Final Words

Bankruptcy is one word that most business owners despise. Even though you can return from it, it will be hard to start again. By avoiding the situations mentioned above and ensuring that you are managing it appropriately, your business might continue to thrive from this point on. 

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