While politicians may debate the merits of the federal bailout to the auto industry, there can be no disputing the fact that American auto manufacturers are back in a big way. In fact, in 2011, GM turned its largest profit ever. This is a remarkable turnaround when you consider that, just two years prior, GM and the U.S. auto industry were on the cusp of bankruptcy.
But it also raises an important question for many of the small business owners that I work with every day–namely, “It’s great that the government helped put GM back on its feet, but what happens when my business needs help?”
As you can imagine, there will be no bailouts for small businesses. It is up to business owners to ensure that their business is sufficiently capitalized. If not, it’s on to bankruptcy.
However, bankruptcy isn’t the death knell that many people believe it to be. While nobody dreams of shepherding their business through bankruptcy, the reality is that it can help viable businesses get back on their feet. It’s also important to understand that there are many different forms of bankruptcy and financing options available. Below are three of the most important:
Chapter 7: Chapter 7 bankruptcy is essentially liquidation. It is appropriate once it is clear that your business has no realistic chance of reorganizing and returning to profitability. During this process, a trustee is appointed who will ensure that business assets are sold and that the proceeds go to the right creditors.
Chapter 11: Chapter 11, on the other hand, is for businesses that still have a fighting chance. This form of bankruptcy allows a business to reorganize its debt and attempt to re-emerge as a profitable entity. Typically, this means reduced interest rates and lowered payments for the business. If successful, the firm will continue to operate with its new debt structure in place. If not, the firm will typically file for Chapter 7 and liquidate.
Debtor-in-Possession: DIP financing is an alternative source of capital for struggling businesses. While not every business qualifies, those that do find it to be an invaluable tool. Debtor-in-Possession financing is administered while a business is operating under bankruptcy, but is unique in that it allows the business to continue operations under specific conditions. The cash that is injected into a business gives management the opportunity to restructure their operation–theoretically allowing them to emerge from bankruptcy as a profitable business. If you are facing bankruptcy, ask your bankruptcy attorney if DIP financing may be a good option for you.
Hopefully, your business will never need the type of assistance that the federal government provided to General Motors. But understand that, should your business run into financial difficulty, that bankruptcy isn’t the “end of the line.” In fact, it could be the opportunity that you need in order to return to profitability.
[Image: Flickr user Riaz K]