Tips for Small Businesses to Avoid Liquidation

Liquidation is a type of insolvency proceeding that applies only to companies, according to the Insolvency Service. It is distinct from bankruptcy, which is limited to individuals. Liquidation requires a liquidator who will “wind up” a limited company’s legal affairs by performing a series of specific steps. The company will cease to exist once this process concludes.

Small companies are more vulnerable to liquidation due to crippling debt, especially during the start up phase. This can occur even when the company receives backing from a venture capitalist if the company’s burn rate is unsustainable. The owner of a small company can reduce the chances of liquidation by following some basic tips on debt management.

Used Equipment

A small company can often reduce its start up costs substantially with used equipment. Furniture in particular is much cheaper when used, resulting in a savings of as much as 75 percent. Used equipment should not impact your business so long as it is functional.

Savings

You should already have personal savings accumulated before you start your company. However, you should bear in mind that using your own money to finance your company can be a risky strategy as new businesses often fail despite your best efforts. If your company is successful, you can pay yourself back after the business begins making a profit.

Friends and Family Members

Friends and family members are a source of financial backing that business owners often overlook. They will often invest in a small business that is too risky for banks and other financial institution. Friends and family members will have a vested interest in helping you succeed since their money is invested in your business venture.

Angel Investors

An angel investor is also an effective method of reducing your company’s debt. These investors receive a share of your company in exchange for equity in that company. They may also have a certain degree of operational control over that company. You can use angel investors to network with other business owners in your niche, which can be an invaluable source of information for a small business.

Market Research

It is essential to perform adequate market research if you want your small business to satisfy accrued debts quickly. Lack of market knowledge in your niche is the single largest cause of a company’s liquidation. Market research includes reading trade journals and studying existing companies in your niche.

Personal Income

You should maintain your regular job as long as possible while starting your new company. Small business owners often work on their new business at home after they finish their day job. This allows you to increase your working capital instead of accruing more debt.

Sharing Costs

Small business owners can often share operating costs with other small businesses in the area. You will often be able to obtain a volume discount by combining your orders with those of other businesses. You may also be able to share resources such as Internet access or storage areas.

Sourcing

A small business often does not require some types of equipment. Ensure that you will actually need office machines right away before you commit to a long lease. In addition, small businesses do not typically require a large inventory of office supplies.

Flexibility

It is important to be flexible when you own a small company. You will typically find that your business accrues much less debt when you run it as on online store rather than as a retail outlet. A brick-and-mortar business requires more capital investment and does not scale up easily as your company grows.

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