Did you know that the total number of small business bankruptcies in Canada was 13.6% higher in May of 2022 than the previous year?
It’s unfortunate that small businesses find themselves in this situation but when small businesses in Canada find themselves struggling in debt it is important to seek out information early about restructuring the business if the owner wants to keep the business operating.
A business should be providing a return to its owners and It is important at this point for the owner to really consider if this business is providing sufficient return to justify keeping it running. Sometimes owners love what they are doing so much they keep investing more and more personal money into the business without assessing if the business is able to give anything back to them at the end of the day.
Review Business Financials
Reviewing the cash flow of a business is an important first step. Some small business owners have just one bank account for both personal and business spending which means it is quite impossible to see clearly how the business is managing and likewise, what your personal spending is. If you are unable to see clearly the ongoing revenue and expenses of the business then you cannot effectively make decisions to help the business navigate through these difficult times.
Once the bank accounts are separate and you can clearly see your personal income and expenses and your business income and expenses you will be better able to see:
- How much you are drawing from the business as personal income – perhaps you can make cuts to your personal expenses
- Is your personal income pulling more from the company than the company can support?
- What are the true expenses of the business
- Opportunities to adjust business expenses
At this time it is important make financial adjustments to help correct your cash flow such as reduce your expenses, discontinue products that are not selling well, layoff staff, renegotiate the terms of your lease agreement, etc. Hopefully these proactive actions will help you return to a healthy financial situation that will allow you to reinvest in new product or service lines when you are financially able to do so.
Take Out a Loan
Once you have a clear look at the company’s cash flow you can consider if taking out a loan would solve your financial troubles. Taking out a loan to save your small business requires serious consideration. Short-term financing can help to cover cash flow shortages while your business continues normally and collects any money owed by customers and clients. Taking out a loan if it is needed to bridge tough times can work as long as it you have clear understanding of how things will change in the future to make paying your current debts and new debts manageable.
Keep in mind that borrowing money means you are increasing the payments you need to make to creditors – if you are struggling to pay your debts now then adding another payment will not help you if you can’t project enough future revenue to pay off your small business debt.
Taking out a loan to avoid small business bankruptcy will not help the problem work itself out – you will need to consider making adjustments to your expenses and increasing revenue in order to make taking out additional debt viable in the long run.
Filing for Bankruptcy As a Small Business
If your small business is a sole proprietorship its means that you and your business are one in the same. You are the only one who owns the business and you are personally liable for any financial obligations. Simply put, when your business is struggling it directly impacts your personal finances and your personal assets are at risk from creditors. In this case you do not have to resolve your business’ debts separate from your personal debts because your business and personal debts are all in your personal name. You have numerous options to resolve your personal liabilities.
A partnership is type of business that allows numerous people to work together on the business and share the assets and the liabilities. These assets and liabilities are owned and owed you your personal capacity – if the business is struggling you would have numerous options to resolve your personal liabilities, similar to the sole proprietorship.
When you incorporate your business the business becomes a separate legal entity. The business will have its own assets and its own liabilities. Small business bankruptcy is a legal process that shuts down the business, sells all the assets to settle the unsecured debts of the business.
To be eligible to declare bankruptcy in Canada the business must have assets and liabilities, owe more than $1,000 to creditors, and be unable to meet financial obligations in a timely manner.
However, this is not the only debt relief option, so it’s important to understand all of the options available to your small business.
Bankruptcy doesn’t mean you can resolve your debts without paying any money. When you are looking at closing down the business the idea of stopping all collection calls is wonderful but bankruptcy can be a costly process so you definitely want to explore all your options when it comes to how to deal with closing your small business. If the business does not have sufficient assets to cover the cost of bankruptcy then the owners of the business will be asked to pay the difference.
Alternatives to a Small Business Filing for Bankruptcy
Bankruptcy is a solution used by corporations that will be shutting down because bankruptcy results in the cessation of all business activities and the eventual sale of business assets for the benefit of the unsecured creditors. If a corporation wants to continue operating they can consider filing a Division I Proposal, or a CCAA for larger more complex companies that owe more than $5 million dollars in debt. Frederick & Company Ltd. is here to help you explore all of your financial options when it comes to your small business.
Restructure the Business By Filing a Division I Proposal
Serious financial trouble doesn’t just come out of the blue. Usually the troubles have been building for some time and before it hits an unmanageable climax you can consider restructuring your business by filing a Division I Proposal. If you wait too long till your cash flow is so restricted you are struggling to pay payroll then it may be too late to restructure as you need sufficient cash flow to operate the newly restructured business without the use of credit.
If you are worried your small business is facing insolvency you can make changes to your operations and procedures to avoid losing more money and further financial damage. If there was a cause to your difficulties and you have corrected for that then you may have a good case to bring to your creditors as to why you have financial difficulties but why those difficulties will not continue.
Restructuring your small business will require you to make adjustments to your operations so you can manage your business without debt and provide a monthly payment to your creditor over the course of the Division I Proposal. As a result of the restructuring you may need to cut expenses, reduce salaries, and sell assets to improve your business’s financial situation and avoid bankruptcy.
Take the time to write out a business plan to see if you can show a positive monthly cash flow without the use of further debt to explore if this is a viable option.
CCAA – Companies’ Creditors Arrangement Act
I wanted to touch on this so you know what this process is but this option is not available for small businesses. This option is available for large complex corporations that owe more than $5 million dollars in debt who require significant restructuring. This process requires the corporation to create a plan that is then presented to court for their approval.
Small Business Bankruptcy – Talk to Our Team!
Small business corporate bankruptcies must be filed through a Licensed Insolvency Trustee – they are the only people in Canada who are qualified to help you through this legal process.
However, even though bankruptcy is a viable option for small businesses, it’s not your only choice!
Our team of professional LITs is here to help you make the right decision. We are dedicated to protecting your best interests and helping you achieve future financial success.