It’s been almost two years since Fortune Small Business Magazine published the story of the Texas restaurant entrepreneur who said, “Filing bankruptcy was the smartest thing I ever did.” Since that time, many small business owner clients of mine here in Indiana have expressed similar sentiments.

To be sure, when debtors first come to see me, they’re usually not feeling smart at all.  In fact, most are suffering from feelings of failure and defeat. Even in this economic downturn, when small businesses fail because of reversals in their market and in their industry rather than because of shortcomings in management, bankruptcy is not a result  any entrepreneur is likely to “stomach” cheerfully. 

Making things worse, I find, is the fact that most small business owners have been lax about separating business and personal finances.  By the time they come to see me, it’s often too late to prevent individual bankruptcy from happening along with the business bankruptcy.

In yesterday’s blog post, I talked about “taking bankruptcy prevention pills” to try to stave off filing.  Which “prevention pills” can work to save troubled businesses?

Prioritize payment of expenses:

  •  Taxes
  •  Rent, utilities, and other basic bills
  •  Payroll  (The Indianapolis Star mentioned companies trying to retain employees who might be demoralized after co-workers were laid off by offering them special”perks” such as on-site child care, flex-time, and recognition programs.) 
  • Suppliers and creditors  (Negotiate for extra time and for better terms wherever possible. Meanwhile, consider factoring your accounts receivable to raise cash.

The main thing to keep in mind through all this is that bankruptcy is a process. It’s certainly true that in this recession many small businesses are turning to the safety net of bankruptcy.  By the same token, though, many of those companies are successfully emerging from bankruptcy, making the fresh start that bankruptcy is all about.