Causes of Bankruptcy

There is, of course, only one cause of bankruptcy, and that is a shortage of money; but are numerous different causes for a shortage. Here are a few of the causes of bankruptcies that resulted in bankruptcies:


Failure to pay employment taxes - this results in exponentially increasing debt to the most dangerous all creditors.

Factoring - Read the contract more carefully. You are paying them far more than you think and you are spending your future income before you get it.

Using personal funds - Are you using personal funds, particularly exempt funds, to fund your business? If you are not certain that it will result in a profit, do not do it.

For contractors - the bidder. The owner is normally the most experienced person there. Bidding is the most important job. The owner should be the bidder. Some contractors set themselves up for failure. They hire an experienced bidder and they pay that bidder according to number of jobs he writes or, by implication, they make his job depend on how many jobs he writes. So, he is being paid to underbid and cover up. Not smart.

For trucking companies - The dispatcher. The dispatcher is the most cost sensitive and the most vulnerable position. A bad dispatcher is like a parasite.

For doctors - tax shelters and investing. Doctors are very intelligent and very good hearted. These two qualities render them vulnerable to investors who are after the doctor's money. The doctor's downfall is that just because he's smart at his office, he believes that he's just as smart outside his office.

For restaurants - The back door. The achilles heel of the restaurant is the back door and the cash register. Only the most trusted should handle the money and the back door should STAY LOCKED. Otherwise, keep it clean with no loud music and serve an excellent fare and charge for it. For the start-up restaurant, initial undercapitalization is a killer. The start-up is much more that opening the door. It is also the first 6 months or the first year. It may take that long to pull in a healthy profit. Simply not enough business? See the problem early and move on.

Sub contractors and handy-men - Letting others take advantage of you. You have lien rights and you have no excuse for not getting paid on every job. You don't need a lawyer to protect yourself. All you need is an easily obtained book on mechanics liens, a calendar, a notary at a bank somewhere and the discipline to mark the calendar and read the damn book.

For manufacturers - Not thinking ahead.

Retailers - Insufficient location/market research. Customers are the cure for all evils and no evil can be cured without customers. Customers are everything. Don't sign the lease until you have exhausted every avenue of study and you know that there will be enough of them.

Franchises - Know who you are dealing with. What is their motivation and what is their risk? If they have no risk and no significant actual investment into your business, then they have nothing to lose if you fail. Do you know that McDonalds does not sell hamburgers? If you don't know this, then don't even think about signing a franchise agreement because you don't know what you are doing. McDonalds does not sell hamburgers. McDonalds sells restaurants.