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What causes businesses to go bankrupt?

On Behalf of | May 8, 2023 | BANKRUPTCY LAW - Business & Commercial Bankruptcy

Thousands of businesses operate in Idaho, and each year a number of them file for bankruptcy. At its core, bankruptcy is the result of a business being unable to resolve or maintain its financial obligations, including debts and standard operating costs.

Business and commercial bankruptcy can be difficult to navigate, though with financial and legal acumen, it may still be possible to save a business. But the better outcome is always to avoid bankruptcy if possible. And to do that, it’s necessary to understand why businesses go bankrupt.

Structural issues causing bankruptcy

In some cases, the reason a business goes bankrupt has to do with the way the business was established. Frequently, with small businesses, the owner’s decisions when starting the business left the organization vulnerable.

Many small business owners are highly skilled and knowledgeable in the technical craft of their business. For example, a master chef who opens a restaurant. But running a business involves more than just practicing a craft or using a skill. Sourcing materials, managing employees, negotiating with suppliers, marketing the business and keeping the books are all critical tasks. And many small business owners find themselves unsuited to one or more of those, which leads to mounting financial problems.

In other cases, a business may have been founded with too little capital and will run out of funds.

Market issues causing bankruptcy

Sometimes, a business may be running satisfactorily, but the market it operates in changes.

This could mean a competitor arises and takes away clients or customers. An area may experience an economic downturn and customers have less money to spend. The public’s taste could change over time and the product or service sold might be less popular.

These circumstances could tip a successful business into a terminal financial situation that leads to eventual bankruptcy.

A business faces bankruptcy when it can no longer meet its financial obligations. Sometimes, a business will go bankrupt due to a faulty business plan. In other cases, changes in the market may lead to bankruptcy.