Critical Mistakes That Can Lead to Business Bankruptcy

Published: 4 years ago, Last Updated: 7 months ago
Daniel Brown
Writer: Daniel Brown

There are a number of errors individuals may make when starting a business or in the everyday running of said business. It can be important for business owners to understand potential mistakes and try to mitigate such errors, earlier in their business ventures.

Some of the mistakes explored below may be benign and may not lead to small business bankruptcies; such errors can be taken as learning opportunities. The path to success is likely to have many bumps on the road, whether you have started a small business to earn extra money for you and your family, or you are aiming to become a worldwide corporation.

In this guide, we examine some of the critical mistakes that can lead to filing for business bankruptcy, how to avoid them, and the types of business bankruptcies you may encounter if you indeed need to file.


Overexpansion, business bankruptcy

Overexpansion can be a common cause of small business bankruptcies. Once businesses start to perform well, owners may start to consider the possibility of expanding. Individuals who start businesses tend to be ambitious, and are typically unlikely to stop at just one small business. But when the time comes to expand, it is critical that owners get it right.

While expansion can be profitable, owning additional properties, bringing in more staff, or assuming more levels of responsibility, may not output the same level of success as prior ventures. Expanding quickly in this way can potentially lead to financial problems and the cash flow issues can be hard to deal with.

There is no guarantee of the second and third premises being a success, of new staff working as hard and achieving the same results, and of the expansion working, which is why it may be better to take incremental steps. Additionally, the more business premises and interests you have, or the more clients you take on as a business, the more your attention might be divided. This can lead to a lot of financial strain, unhappy clients, and, ultimately, potential bankruptcy.

Failing to Adapt

It may be easy to think that your system is working and not have ambitions to stay ahead of the curve. But when push comes to shove, and technology and society move on, failing to adapt can be one of the worst things for your business.

Most people can think of businesses that were successful on the high street but have failed to translate that success online when the dot com revolution came — many of these businesses went bankrupt. Think of Blockbuster, and the switch to streaming services rather than rentals; this change happened gradually, but Blockbuster failed to adapt.

One way businesses can maintain their successes is by being one step ahead of the game. It can be important for owners to take a step back from day to day business running to have a strategic outlook on where their business is going. A prime example of this might be the way Amazon has consistently stayed ahead of the curve, with faster delivery, the incorporation of streaming services, and additional innovative technologies.

A failure to adapt can come from being lazy or resting on the successes you have already had as a business. Instead, think about how you can test out new ideas, and keep a close eye on competitors.

Poor Hiring

When it becomes time to hire new employees, it is essential that business owners get it right. Your employees need to offer something to your business, but they also need to care about what you are trying to achieve.

The qualities that make a good hire, and what to look out for when the time comes to bring someone new onboard, wholly depends on what type of business sector you are in, as different industries require different hiring methods.

For example, some businesses will look to hire the best-qualified member of staff in terms of their experience and where they have studied, while others may prioritize other more technical skills. Regardless of the specific situation, it is important to think about the bigger picture when hiring a new individual: what are their business ambitions, what do they want to achieve,  and are they are likely to give the job their all.

To this end, the interview process is vital, and many small businesses and startups may not spend long enough ensuring that the people they bring on board will be suitable fits.

Damaged Reputation

Causes of business bankruptcy

A damaged reputation can also be a viable cause of business bankruptcy, especially in customer-facing businesses. Businesses who may have soured their public image due to a scandal may find that they need to take immediate measures.

In the modern age of digital transparency, people can search for your business name online, and often find that bad reviews have stuck to the first page, or changed your ranking in Google places. Getting rid of a bad review may be near impossible, so it can be important to make sure that the good reviews far outweigh any negativity.

If your service or business does not live up to people’s expectations, the word may get out and your bottom line may be impacted.

How Does Business Bankruptcy Work?

how does business bankruptcy work

There are different types of business bankruptcies. Talking to a business bankruptcy attorney might be the best way to establish which is best if the time comes to file. It is important to note that filing does not always mean the end of your business interests, as it is possible to recover and find success in the future.

Chapter 13

Chapter 13 is typically reserved for use by individuals who have sole proprietorships, meaning that the responsibilities of the business fall solely upon them. Filing Chapter 13 can be an ideal option for businesses that want to reorganize rather than liquidate, altogether.

Usually, with the help of a bankruptcy attorney, you can make a repayment plan with a detailed system for repaying the necessary debts in the future. The amount repaid depends on earnings, assets, and more, so it can be important to get professional help when it comes to putting a repayment plan together.

Chapter 7

Chapter 7 is typically for businesses that do not plan to continue and is thus referred to as liquidation. It is used when businesses will not be able to restructure successfully and can be a suitable option for most types of businesses, partnerships, sole proprietorships, and corporations alike.

For individuals who do not own many assets to repay the debts that they have built up, it may not make sense to reorganize and restructure obligations. Instead, liquidation via a Chapter 7 Bankruptcy could be the most ideal option.

Chapter 11

hapter 11 bankruptcies may be appropriate for businesses that still feel that they can operate in the future. While this may be a viable option for bigger corporations and partnerships, oftentimes, sole proprietors with high-income levels may not qualify for using Chapter 13 and may need to opt for Chapter 11 instead.

Chapter 11 may be a suitable option for businesses with many assets or that have great potential for the future. During Chapter 11, a plan is made with a court-appointed trustee; this plan typically details how creditors will be repaid.

Business owners must be aware that while chapter 11 bankruptcy can be fit for certain scenarios, it may not be the ideal choice for every type of business as it is the most complex of the options and needs to be considered carefully.

When looking for a suitable file to claim, it is vital that individuals think about the scenario they are in. It may be worth talking to an attorney in order to get the help that is required and to ensure that the correct option for both personal finances, and business possibilities, are chosen.


Cases of bankruptcy may be avoided with some forward-thinking and preparedness. Although some may perceive bankruptcy as a positive option, it is typically not an advisable solution to monetary-related issues and may limit future lending options. Being aware of and understanding common critical business mistakes can be important in helping you avoid bankruptcy.

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