How to Avoid Bankruptcy and Save Your Business From Closing

Some struggling businesses may be eligible for COVID-19 relief.

Small business owner worried about finances

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Is your business struggling to stay afloat? If the answer is yes, you are not alone. According to Harvard-based, nonprofit research organization Opportunity Insights, the number of open small businesses declined by 29% between January 2020 and Dec. 9, 2020.  

While this statistic can seem discouraging, it's important to remember that over two-thirds of the small businesses that were open at the start of 2020 were still operating 11 months later. Some likely experienced financial problems similar to yours but were able to overcome them. If your business is facing financial challenges and you want to avoid closure, here are some steps you can take to keep it up and running.

Assess Your Finances

To determine whether your business can remain open, you'll need to assess your finances. You can start by asking yourself some key questions.:

  • Does your business have enough cash flow to meet its financial obligations, like rent, utilities, payroll, and other expenses? 
  • Are you paying its debts on time, including personal debts you've assumed on behalf of the business? 
  • Does your business have enough cash reserves on hand to cover emergencies? 

If the answer to these questions is no, you'll need to trim your costs.


A credit counselor is available at little to no cost and can evaluate your company's financial situation and help you improve it. Look for a counselor affiliated with the National Foundation for Credit Counseling.

Look for Opportunities to Cut Back

One way to help your business meet its obligations is to reduce or eliminate expenses. As your biggest expense is probably your rent, talk to yourlandlord about ways to reduce your monthly rental payments. Perhaps you could rent less square footage or sublet a portion of your rental space. Alternatively, your landlord might be willing to reduce or defer your rent or forgive a portion of it.

Next, look at your other expenses to see where you can cut costs. Here are some options to consider.

  • Outsource nonessential functions like payroll or administrative work.
  • Cut back on discretionary spending such as parking validations for customers.
  • Reduce utility costs. For instance, you might eliminate an extra phone line, switch to a less expensive mobile service provider, or shop for cheaperbusiness insurance.
  • Review your equipment leases. You may be leasing equipment you're no longer using or that you could obtain more cheaply from a different vendor.
  • Review your payroll and look for ways to cut costs, such as laying off workers or switching full-time employees to part-time.


Review your accounts receivable records to identify clients who are behind on their payments. You may be able to improve your cash flow by stepping up collections.

Ask for Flexibility With Suppliers

If you buy supplies on credit and are behind on your payments, explain your situation to your suppliers or vendors. They may be willing to negotiate a payment plan or reduce your payments. If you've developed a good relationship with your vendors and suppliers, they'll have an incentive to retain your business as a client.

Communicate With Lenders

If you are unable to make scheduled payments on your mortgage or other business loans, speak with your lenders right away. Defaulting on a loan can have serious consequences, including a lower credit score, late fees, and a lawsuit by the lender for the amount owed. You may be able to avoid a default by contacting your lenders promptly and explaining your situation. Your lenders may be willing to defer the loan, extend the loan term, or work out a payment plan.

Prioritize Your Debts

While all debts must be paid, some are more important than others. Prioritize your debts so you know which to pay first. One of the most critical debts for small businesses is taxes, including income, payroll, and property taxes. Tax money belongs to the government, not your business, so it should be your first priority. Your second priority is payroll, and your third is any bill that's overdue by 60 days or more. 


Once those debts are satisfied, you should pay your remaining bills in the following order: operating expenses (like rent and utilities), vendors and suppliers, secured debts, insurance, and credit cards.

Take Advantage of Government Programs

Many struggling small businesses can get help through a state or federal program. A logical first step is to check with the Small Business Administration (SBA) to see whether you qualify for a disaster loan. The SBA provides loans to businesses that have sustained property damage losses or economic injuries due to declared disasters. You can apply for a loan or learn about your options at the SBA website.

COVID-19 Relief

If your business is suffering financial problems due to theCOVID-19 pandemic, you may be eligible for assistance through the Paycheck Protection Program (PPP). Though the PPP initially closed in August 2020, Congress and President Donald Trump revived the program with the passing and signing, respectively, of the Consolidated Appropriations Act at the end of 2020. The program provides eligible businesses a forgivable loan if their gross receipts for any one quarter in 2020 declined by at least 25% from the same quarter of 2019. Businesses must use at least 60% of the loan amount for payroll costs. PPP loans are available through the SBA.

Another coronavirus-related loan that’s available through the SBA is the Economic Injury Disaster Loan (EIDL). The EIDL is offered to businesses currently experiencing a temporary loss of revenue due to coronavirus. Businesses can borrow up to six months of working capital to cover a wide variety of expenses, including rent and utilities. 

When the pandemic began to surge in the U.S. in March 2020, some states began offering loans or grants to businesses affected by COVID-19. Others issued moratoriums on evictions of residential and/or commercial tenants who were unable to pay their rent due to COVID-19. While some of these programs may have expired, others may still be active. Check your state government’s website to see what’s available. 

If Absolutely Necessary, Consider Chapter 11

Suppose you've taken the steps outlined above, and you want to keep your business going, but you just can't pay the bills. It's probably time to consider filing for a Chapter 11 bankruptcy. This type of bankruptcy allows you to continue operating your business while reorganizing your debts. You'll need to submit a reorganization plan to the court explaining how you'll repay your debts. Once your plan is approved, you can start negotiating with creditors to eliminate or restructure your debts, sell off assets, and take other actions to make your business profitable.


You should not file for bankruptcy without consulting an attorney. A bankruptcy attorney can help you decide whether bankruptcy is your best option, and if so, walk you through the procedure.

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  1. Opportunity Insights, Economic Tracker. "Percent Change in the Number of Small Businesses Open." Accessed Jan. 5, 2021. 

  2. "Bill Announcement." Accessed Jan. 5, 2021.

  3. "Rules Committee Print 116-68: Text of the House Amendment to the Senate Amendment to H.R. 133." Page 141. Accessed Jan. 5, 2021. 

  4. U.S. Small Business Administration. "Paycheck Protection Program, Loan Forgiveness Application." Pages 3-7. Accessed Jan. 5, 2021.

  5. "H.R.7010 - Paycheck Protection Program Flexibility Act of 2020." Accessed Jan. 5, 2021.

  6. U.S. Small Business Administration. "Frequently Asked Questions: COVID-19 Economic Injury Disaster Loan (EIDL)." Accessed Jan. 5, 2021.

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