Bankruptcy and insolvency usually refers to a person or a business being declared having insufficient funds to clear of the outstanding debts. It is usually a very difficult and a painful process where a business or a person has to stop all activities, wind up the business and then pay off the employees and creditors by selling all the assets that are owned by that business. It is a practice that is looked down upon and is considered to be humiliating. However, there are some people who do not feel that filing for bankruptcy is a bad business move. Smart accounting and business acumen will tell you that it is a great way to actually protect your core business and assets.
The basic fundamental here is that your business should at least be a Private or a Public limited company. What most businesses do is that they try to get into too many businesses at the same time and in the process they spread themselves too thin. Due to this they are not able to allocate appropriate resources, time and effort to any business, thus resulting in failure of all their ideas.
A smart person would first be successful in one area and then focus on getting successful in allied or similar businesses. The difference here is that each business will be registered as a separate entity. It may have the same address, the same directors, but it will have a different bank account and identity. This insulates your main business and its assets and funds from creditors and vendors. If your secondary business does not work as per your expectations for whatever reason, your personal assets and your other business’ assets are safe from litigation as you have kept both the businesses as separate entities.
Why is filing for bankruptcy is a good idea? Sometimes, despite our best efforts, businesses fail. It could be due to political reasons, natural disasters, lack of capital, lack of skilled talent or for any other reason! The decision that you as a business need to take is whether it make business sense to keep on increasing your debt and expenses and continuing in the business or whether its best to cut your losses and call it a day!
If you are passionate and believe in your business, you may choose to continue, but if you feel otherwise, filing for bankruptcy is not a bad option. Many big businesses are also in this category. They realize that they are unable to generate a cash flow and a profit and all they are doing is taking on more debt. Sometimes when you file for bankruptcy, you have an option for applying for financial reconstruction. This lets you restructure your loans in a way that is more bearable for your business. This may significantly reduce the debt and may also give you a lot many Government benefits that you may otherwise not have received.
Knowing which benefits apply for your business and being able to limit the promoter’s liability is knowledge that very few people have. Again, getting Government benefits is subject to getting the officials on board. Being well networked is crucial in these situations. It helps if you are able to learn this from experienced professionals. BSE Institute Ltd (BIL) offers a short term course on managing insolvency for businesses, company executives and accountants.
When you file for bankruptcy, your vendors, employees and creditors realize that there are not too many funds in the bank and may thus be willing to take a significant price cut, thus making business workable for you. Once you file for bankruptcy, the creditors and vendors realize that they will be getting a very small fraction of the funds owed and hence they will be willing to adjust their prices.
Insolvency is not good situation to be in, but one must be prepared for any situation when pushed into it. As a good businessman, you always need to strive to get a good deal to promote your interests while protecting the interests of your employees and vendors.