When a business has gone bankrupt, the impact on its stakeholders can be immense. Typically, when a business is going under the weight of huge debts, it will not have much money to pay its creditors. At the same time, it will also lose any assets that it does have. It would be hard for any business to rebuild its reputation after it has gone bankrupt and any assets that it does have will be at a significant value.
While a small business will have less capital to play with than a corporate body, the impact on its credit rating is likely to be much higher. As a matter of fact, even if a bankrupt business gets enough credit to restart operations, the interest rate on its debt will be much higher than a debt-free entity. Typically, a bankrupt company will have to repay all of its debts over a very long time frame. In the worst case scenario, it may even have to seek financial assistance from the Government in order to raise funds.
The impact of bankruptcy on small businesses is particularly acute in the United States where the Small Business Administration (SBA) regulates most of the financial activities of the small businesses in the country. Among other things, this agency seeks to ensure that the business has access to the necessary working capital, as well as access to a loan facility that can support its continued operations. On the other hand, if a creditor believes that there is a high probability that the business will fail, the creditor can take steps to have the court compel the insolvent company to pay up on its obligations. This has been a common practice for most US-incorporated companies.
One of the effects of going bankrupt is the impact on the stock market. If a company is down by more than 25 percent in one day, it will almost certainly get wiped out in the stock exchange. This happens because the small/growing firm will be forced to sell its assets in order to repay its debts. As the company sells off its assets, its credit rating goes down and its creditworthiness as a borrower deteriorates, the interest rates it will have to offer for new loans decreases. In effect, lenders are forcing the small/growing firm to choose between either reducing its business activities or even going out of business itself.
One of the few ways that a company can recover from its situation is through a Limited Liability Company or LLC. Under such a setup, all of the assets of the business are controlled by its owners; so if it goes bankrupt, only its shareholders will lose their investments. In contrast, if a sole proprietorship declares bankruptcy, its assets are generally exempt from liquidation and its owners will also not lose any of their rights to the business. A Limited Liability Company also allows the business owner to enjoy several different tax treatment options.
A few years ago, a business went bankrupt and was required by the Court to redeem its debts. The company was forced to sell its assets, and the Court also insisted upon its repayment by gifting it a gift card. The gift card, along with interest, penalties and costs were to be paid over a specific period of time in return for its return to the business owners’ accounts.