Businesses, both startups and established ones, go through financial constraints now and then, and then they bounce back. However, at times, a financial challenge may make it impossible for a company to operate effectively to the extent that filing for bankruptcy might be the most suitable solution.
But how do you know it’s time to file for bankruptcy?
Are you struggling to pay off your debts?
If your cash flow is consistently decreasing, resulting in an inability to pay suppliers and creditors, you should be alarmed. You may even find yourself taking on new debts to pay existing ones, which leads to an increase in debt levels and interest payments. It can be beneficial to declare bankruptcy to either reorganize your debts and keep operating or liquidate your assets to pay creditors.
A financial challenge can also make it impossible for an employer to pay employees. Typically, employees become creditors in a bankruptcy case.
Is your debt-to-equity ratio high?
If your business’s debt-to-equity ratio is high, it means most of the company’s assets are financed by debt as opposed to its shareholder equity. Whether or not creditors have started calling your company, you need to take protective measures. You can increase equity by issuing new shares to investors or boosting revenue, for instance, you can venture into a new market.
However, if increasing equity is not an option and your business is on the brink of becoming insolvent, consider restructuring your debts by filing for bankruptcy.
Are you facing legal action from creditors?
If creditors have made several attempts to receive payment and are now taking legal action against you, it can help to declare bankruptcy.
Filing for bankruptcy can benefit your business in various ways. Learn more to determine the right type of bankruptcy to file.