Thinking of bankruptcy? Know what it really means for your small business

Succeeding in business is a major accomplishment—one that’s underlined by the low survival rate of new ventures. Almost half of all small and mid-sized businesses (“SME”s) in Canada fold within five years of launching, and about 500 out of every 1,000 SMEs file for bankruptcy each year.

If you’re the owner of a small business that’s struggling to pay its bills, chances are you’ve considered declaring bankruptcy. Before you decide to take this step—make sure you understand what bankruptcy would mean for your business.

Is it a good idea in the first place?

Bankruptcy gives your business legal protection from your creditors. They can’t start a legal action against your company once you file for bankruptcy, and any legal actions that are already underway are halted immediately. At the same time, the laws governing business bankruptcy do address the interests of all stakeholders, including suppliers, service providers, government bodies and employees, making it an ethical way to shut down a business.

Filing bankruptcy makes sense for companies whose debts are greater than the realizable value of its assets. These companies are typically not profitable, cannot afford to pay their bills and owe Canada Revenue Agency money. For these key reasons, many small businesses in financial crisis choose to declare bankruptcy.

So how will bankruptcy affect day-to-day operations?

The simple answer: bankruptcy shuts down a business. As soon as you sign the paperwork that your Licensed Insolvency Trustee (LIT) submits to the Office of the Superintendent of Bankruptcy Canada, your business operations stop. The LIT then informs your creditors and employees that your company has filed for bankruptcy.

In certain cases, the LIT may choose to operate the business to fill outstanding orders and to aid in the collection of the accounts receivable (“AR”). The rationale behind whether to operate the business is based on a cost benefit analysis.  Will the amount that the finished goods are sold for and the collection of the AR be higher than the cost of operating the business for the short term?

Your business is shut down: What happens next?

To pay your creditors, the LIT will work with you to realize on your business assets.  This may include selling equipment, trademarks, and collecting the AR. While the LIT oversees this effort, it’s not unusual for business owners and former staff to take an active role in collecting outstanding payments from the business’s customers. The owner and former staff will have better insight into the circumstances of the money owed by the customer. Some owners help the LIT realize on the assets because the owner has personally guaranteed a business loan or line of credit and want to ensure that all efforts are made to realize on the assets so the owner is not personally liable, or at least reduce the amount of the personal liability.

If your business has employees, the LIT will apply for them to be paid under the Wage Earner Protection Program. This federal government program pays up to seven times the amount of employees’ earnings covered by employment insurance, less a deduction of about seven per cent.

Is there an option other than bankruptcy?

Yes. A proposal will allow you to continue to operate your business and will provide some relief from the current financial burden. A proposal is a deal with your creditors.  You may pay them 100 percent of what they’re owed, over time or compromise the amount they’re owed. The main rule is that the creditors receive more in a proposal than they would if your business were to file for bankruptcy. The proposal must be realistic. Your creditors ultimately decide whether to accept the proposal offered, and if they choose to not accept it—the business is bankrupt.

Easing your path in this difficult journey

From the time your company started struggling financially to the day you put your business into bankruptcy, you’re likely to go through a range of emotions. That should come as no surprise. Entrepreneurs are take-charge individuals and the financial failure of their venture can leave them feeling uncharacteristically helpless and overwhelmed.  Remember, business failure is a risk of all businesses—many successful business owners have had prior businesses fail.

Having the support and guidance of the right professional can make all the difference. An experienced LIT can walk you through your options and explain how a bankruptcy filing can affect your business, the people who work in it and you personally. Getting this help early is critical. If you’re considering bankruptcy, it’s important to seek professional help with a LIT sooner than later, while you will have some control in the process.

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Thinking of bankruptcy? Know what it really means for your small business was last modified: November 7th, 2018 by Licensed Insolvency Trustee