Why does bankruptcy occur in small businesses?

Bankruptcy is a very real threat to small businesses. After all, we’ve recently seen Jamie Oliver’s restaurant empire start to crumble with his sales down 6% year on year, so if he’s struggling, what’re the odds looking like for smaller businesses?

What’re the causes of bankruptcy in SMEs, and how can they be best avoided? Firms like Think Money offer viable solutions in this situation, but obviously, most smaller businesses would rather not go bankrupt in the first instance!

Consequently, let’s investigate why bankruptcy occurs in smaller businesses.

Economic factors

It’s no secret that Brexit is causing a great deal of uncertainty in businesses, especially smaller firms who’re growing increasingly concerned at the likely outcomes of the chaotic process.  Many are choosing to keep their cards close to their chest and play it safe when it comes to big spending and major corporate decisions. In a sense, many processes are currently on hold in smaller firms, causing SMEs to, unfortunately, stagnate somewhat, with investments 10% lower than official forecasts prior to the referendum.

Still, factors like the 2008 recession also impacted businesses greatly too, as the economy shrank by 1.5% in the last quarter. Ultimately, SME’s need a thriving economy to persevere themselves, as it’s how they get confident customers through their doors who’re willing to splash out on their goods and services. A steady economy also means the firms have more manageable fees when it comes to the day-to-day running of their business and ensures that processes can grow and develop at a steady rate.

Money woes

It can be tough for businesses to hit the ground running in the finance department. They need to secure premises, licencing, staff, pension schemes, marketing strategies, training programs, equipment, goods and supplies, B2B relationships and more. There’s a lot they need to do, and most of it comes with a hefty price tag attached.

Consequently, many small businesses struggle from the outset unless they have a considerable fortune at their disposal. Loans start being secured, and debts can start tallying up too. After all, self-employment levels are rising, but as is the debt these business owners are accumulating. At the end of 2018, 15% of the UK workforce was classified as self-employed, but a third of these workers had an annual turnover of less than £25,000, with debts of more than £30,000. Obviously, these aren’t viable figures for any business.

Skill shortages

Because more and more people are becoming self-employed and starting their own small businesses, it’s safe to say that not all of these people have a ‘business frame of mind’ in their operations. They may well provide certain services, but ultimately some go on to neglect the basic skills needed to nurture a small firm into a fledgling company; budgeting, marketing and SEO strategies, product placement, brand image, employee retention etc.  

Many people who start a small business assume they can just monetise their hobby, but obviously, things aren’t as straightforward as this. While it might bring in an extra but smaller income, most people can’t afford to solely live off these pursuits without a flair for business and industry. Therefore, bankruptcy can simply occur because business owners simply aren’t prepared for what’s involved in running a firm on a day-to-day basis.

Conclusion

Running a small business can be an unpredictable minefield. With the right sensibilities, smaller firms can certainly avoid bankruptcy and ride out economic hardship. However, business owners need to be knowledgeable and strong-willed to persevere under these circumstances, and unfortunately many are not yet quite so efficient.