6 Common Causes of Small Business Bankruptcy

It’s been said that learning from one’s mistakes is a sign of wisdom. However, learning from other people’s mistakes is usually far less painful — and it’s usually a lot cheaper, too.

With this in mind, according to experienced bankruptcy attorney Charles Huber, principal of the Law Office of Charles Huber, here are six common causes of small business bankruptcy that you hopefully have the time and means to mitigate, or better yet, completely avoid:

  1. Running out of working capital.

Running of out of working capital can, and often does, signal the beginning of the end for small businesses. That’s the bad news. The good news is that even though many banks have severely dialed back their small business funding since the Great Recession, there are plenty of options in the alternative lending marketplace. Yes, you’ll pay a premium. But if you’re approved, then you’ll quickly get the cash you need to stay afloat and turn the corner.

  1. Not understanding the marketplace.

It’s strange that some people spend more time researching the purchase of a new house, car, or heck, even a laptop or smartphone than they do conducting market research. Failing to understand the marketplace is a deadly sin that often leads to an early exit.

  1. Excessive specialization or one-size-fits-all.

In order to avoid getting whacked by the competition, some small businesses dive so deeply into a niche, that they ironically cut themselves off from a large portion of profitable customers. And on the other end of the spectrum, some small businesses are so worried about this very problem, that they try to be all things to all people. Unfortunately, unless the name of your business is Wal-Mart, this is likely to end up in disaster.

  1. Premature expansion.

Logically, a small business with one location that earns massive profit should be able to open a second (and a third, and a fourth…) location, and enjoy exponential ROI. However, the business landscape has its own logic, and often punishes rather than rewards small businesses that scale up too fast, too soon. Often, this is because business owners fail to take into consideration the excessive — and possibly prohibitive — overhead costs, such as telecommunications, networking, utilities, leases, salaries, and so on.

  1. Not adapting.

The only thing more fatal than not having a vision, is being unwilling or unable to adapt to changes in customer demand and marketplace dynamics. In business, change isn’t the exception: it’s the expectation.

  1. Lack of leadership.

And last but certainly not least, small businesses that lack strong leadership and a solid succession plan are often destined for the dustbin of history. Click here for advice on the best leadership style for your business.

Bottom Line

If your small business is struggling with some, a few or maybe all of the above — and it’s all adding up to a balance sheet that isn’t balancing the way that you need it to — then filing for bankruptcy might be the smartest and safest way forward. What’s more, if you qualify for a chapter 11 filing, you’ll be able to continue operating your business while you restructure and pay down your debts.