Small Business Ventures and Causes of Bankruptcy

Filing of bankruptcy may lead to a negative effect but this can be avoided with some bankruptcy alternatives. Such alternatives include credit restructuring, negotiation with creditors or formal proposal to creditors.

Bankruptcy pertains to the legal declaration of an individual or corporation regarding the inability to settle their debts to creditors. This happens when a business does not generate enough revenue to cover up its expenses or if the business is mismanaged. Bankruptcy can be filed by an individual or company at bankruptcy courts. It is a legal procedure that discharges debts of the individual who has filed bankruptcy. This may save an individual the burden of repaying his creditors. However, this will have a negative effect and will make it difficult to borrow money again.

Small businesses usually have a small workforce. In legal terms, small business differs by countries and by industries. In the US, small businesses usually have employees not more than 100 while the European Union has fewer than 50 employees belonging to the category mentioned. In Australia, 1 to 19 workforces belong to the small business category while businesses with 20 to 200 workforces are considered as medium businesses.

Small businesses are privately owned corporations or sole proprietorships. In other instances, annual sales and assets are used to classify the size of a business. Small businesses exist in all countries. Common examples of these businesses are convenient stores, bakeries, beauty parlors, restaurants, photography firms, cyber cafés, etc.

A few great advantages of small businesses are that they can be started with the least cost. They can also either be part time or full time. These businesses can be smoothly run too because they only involve a small number of employees. In addition, small businesses can easily resolve major decisions without implementing bureaucratic system.

Start up capitals of small businesses largely come from:

• Self-financing
• Loans from friends and relatives
• Loans from lending institutions such as banks
• Partnerships
• Collateral based lending

In most cases, a lot of small business owners tend to be in a hurry when establishing their business. They do not conduct necessary studies essential for the success of the business. Feasibility studies and market surveys are vital before engaging in any business. And because of the size of small businesses, it is common that they will suffer bankruptcy.

Undercapitalization, along with poor planning and mismanagement are one of the usual problems that lead to bankruptcy. At this point, the business owner can file bankruptcy. In some countries, they provide exemptions to small businesses assets so that they can operate even during or after bankruptcy.

It is a basic principle that small business owners should have at least enough funds equivalent to the projected income for the first year of operation. This is a buffer for the fixed expenses that maybe incurred. In the event that the business does not have the funds for this requirement, the company is likely to experience bankruptcy. Besides the security of enough funds, the entrepreneur should also consider its gross sales versus its expenses. The company must target a gross income that exceeds the fixed expenses in order to break even. This is at least manageable as compared to bankruptcy.

The strategy of most small businesses during their initial operation is to under price their products in order to capture potential market. This is the planting period that can typically last for a few weeks or months depending on the results. If the strategy has generated enough market, then prices of the products will gradually increase to generate more profit. But if this fails, it would be a big loss for the enterprise and it would find it tough to recover.

There are other factors that render a small business to just about cope with its capitalization requirement and operation. Some of these are due to high cost of insurance, energy costs, and taxes. Lack of management skills is a big issue that may cause bankruptcy, as well.

In the occurrence of bankruptcy, business owners may perform certain crucial decisions or strategies. They can have the option of selling the business to a new owner. Or proprietors can sell its assets to generate money to repay its obligations such as unpaid salaries, taxes, and any other liabilities. In a few cases, reorganization can be implemented to acquire the necessary skills in order to run the business smoothly.