BUSINESS BANKRUPTCY IN CANADA: DISCOVER THE CAUSES OF BUSINESS INSOLVENCY AND BANKRUPTCY - Ira SmithTrustee & Receiver Inc.

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Table of Contents

Business bankruptcy in Canada introduction
Bankruptcy vs insolvency
The main causes of business bankruptcy in Canada
Insolvency for business: There are 3 types of business arrangements
Business bankruptcy in Canada: How to avoid bankruptcy and save your business
There's been no spike in personal and business bankruptcies, but surge is expected
Business bankruptcy in Canada summary

Business bankruptcy in Canada introduction

A business bankruptcy in Canada creates a very difficult time for its owners, employees, suppliers, and families. Bankruptcy can be the result of many things, including poor business decisions, bad economic health conditions, changes in government regulations, increased competition or a combination of all of these. Yet no matter what brought it about, this will be difficult for those involved with the business. Entrepreneurs will need to find the right party to lean on to help them analyze everything and first see if there is a way to save the business.

If you are in this situation, it is important to know that you do not have to, and should not, go through this alone. In today’s Brandon Blog, I will talk about, from the perspective of a licensed insolvency trustee, what the main causes of business bankruptcy in Canada are and how to avoid business bankruptcy in Canada. These steps will help you look at your business’s financial problems in a different way. It may very well be such that you can do the financial restructuring of all or a part of your company’s business properly and avoid a long-term debt to your creditors.

In my next Brandon Blog, I will write about the formal insolvency proceedings available to an insolvent business in Canada.

What’s in it for you, the entrepreneur? This will help you become a healthier business owner and get you out from under the panic and stress the current environment causes.

Bankruptcy vs insolvency

Regular readers of my Brandon Blog will know that I briefly describe the difference between in many blogs. Before going any further, it will be helpful if I just give you a refresher as to the distinction between the two.

Bankruptcy vs insolvency is two extremely different things, although people often say them thinking they mean the same thing. Insolvency refers to a circumstance where an individual or company has more debts than assets. Once the property has been entirely liquidated, there is not enough cash to settle all the debts. This is the economic problem where the company or individual experiencing financial difficulties is said to be insolvent. It is a financial condition.

Bankruptcy is a legal process. A person or company who is insolvent can file for bankruptcy. Or, one or more creditors can make a Bankruptcy Application to the court for a Bankruptcy Order to be made against the financially troubled insolvent person or company. Bankruptcy is a legal state.

The main causes of business bankruptcy in Canada

In my opinion, no one cause is responsible for causing business insolvency or business bankruptcy in Canada. It is usually a combination of things. From my experience in dealing with troubled businesses, I have found there are a variety of factors.

Some are internal to the business and some are external. The internal causes are ones that the entrepreneur has full control over. Similarly, the entrepreneur has either very little or no control over external factors. The following, in no particular order, is my laundry list of the main causes of business failure in Canada.

External causes of business failure in Canada

an economic slowdown or recession
increases in competition
loss of a major customer as the outcome of relocation or market modification or business sector
government regulations
technological change
being a victim of a fraud
labour issues including the loss of key employees
war
a global pandemic

Internal causes of business failure in Canada

While variables beyond a businesses’ control absolutely play a significant role in the failure, numerous businesses that declare bankruptcy additionally struggle with internal issues. While external deficiencies are important to some degree, many failures happen as a result of internal issues mostly rooted in the deficiencies of senior management – the entrepreneur.

Internal root causes of bankruptcy can be categorized as consisting of troubles associated with:

lack of sufficient business monitoring abilities
firm strategies that don’t work
growth and acquisitions that did not work either because of overpaying or lack of funding to support the new business growth and activity
lack of proper financial planning
business administration and record-keeping deficiencies
human resource errors
lack of proper advertising and marketing
undercapitalization – lack of proper cash on hand and financing

Insolvency for business: There are 3 types of business arrangements

Before getting into the strategies that insolvent businesses can use to avoid business bankruptcy in Canada, and to discuss how business bankruptcy works, keep in mind that there are essentially 3 kinds of business setups. They are:

Proprietorship

A proprietorship, also known as a sole proprietorship, is a business entity owned by one individual. There are few formalities to create a sole proprietorship, and many businesses start as sole proprietorships, particularly small businesses. As a sole proprietorship generates profits, the owner is taxed personally on the income.

The main disadvantage to this form of business is that you are personally responsible for all of the business debts and obligations, which means that if you don’t pay the business bills, your creditors can sue you personally and if they get a judgment, seize your personal property, whether it is used in the business or not.

Partnership

A partnership is like a proprietorship, with one main difference. The difference is that it involves two or more people. They share the business profits or losses under an agreed formula. The method used to share profits and losses tends to be based upon each person’s value to the business.

Just like in a proprietorship, the partners are personally responsible for the business financial obligations.

Corporation

When you incorporate a business, you create a corporation. The company is a different legal entity from its owners, the shareholders. That means shareholders are not responsible for the unpaid debts owed to the creditors of the company or its business. The only exemption is that if an entrepreneur shareholder directly guarantees a debt of the company, such as a business loan, then that person is also liable.

In the event of default, the lender can require repayment from both the company and the guarantor. Generally, shareholders just risk the cash they used to purchase the shares of the company and any funds they may have loaned the company.

Business bankruptcy in Canada: How to avoid bankruptcy and save your business

Now that we understand what can go wrong in a proprietorship, partnership or corporation carrying on business, we need to look at what some fixes may be. Not every business needs to go into bankruptcy due to financial difficulties. The first decision point is if your business is still viable. Is there still a vibrant market for the goods or services your business provides? If yes, then you have something worth trying to save.

Here are the steps I recommend taking in analyzing your business to save it:

1. Assess your business cash flow – When looking at the overview of business cash flow needs, it is important to have a clear understanding of your business structure, the services or products you offer and the number of clients you have. Knowing this information will give you a clearer picture of your cash flow requirements.

You must understand your business’s cash flow needs. The very best method is to develop a reasonable monthly cash flow forecast. This is a record that details your business’s monthly forecasted income and expenses on a cash basis for the next 12 months. This will be an important part of establishing an organization strategy, which will be a guideline for how to improve your business’s financial position.

2. Assess your assets for funding or liquidation opportunities – One of the most important things a business owner should do when looking for ways to raise cash is to seriously assess their current financial position. A company’s assets continue to change over time, and a good business owner will regularly review these figures to make sure the company is in the best possible financial shape to raise cash. This process is called “asset analysis,” and it can help a company identify where and how to obtain the best possible funding.

Perhaps you need to focus on shortening the period of time it takes to collect accounts receivable from your business debtors. Maybe there is either redundant or slow-moving inventory that can be liquidated. Perhaps there are some fixed assets not in use that can be sold to raise cash.

When your business is in trouble, you can’t think about the fact that you may be taking a loss on the sale of inventory or other assets. The name of the game is that you need to raise cash today. If you no longer can use certain assets to produce revenue for your business, it may just be time to sell them to raise the much-needed cash.

3. Take a critical look at all your business expenses – “Take a critical look at all your business expenses” is a sentence that is quite hard to start your day with. It’s a sentence that will lead you to an endless stream of thinking of all the ways you can do to save money. It’s a sentence that will make you question yourself if you are using your cash flow most efficiently. It’s a sentence that will make you think that you might be doing more harm than good to your business.

Nevertheless, it is a must. Businesses in most industries regardless of firm size have been hurt badly due to the COVID-19 pandemic. The credit crunch is in full swing and it’s easy to see how your business has been hit hard. You may not be able to do anything right away about your debt payments, but there may be other opportunities for cutbacks.

If your business has seen its financing alternatives run out, it’s important to take a hard look at your costs. Are you spending too much on advertising, marketing, staff wages and salaries, management salaries or supplies? You need to take a critical line-by-line look and eliminate enough costs given current revenue and market conditions. The cuts will not be easy, but many family’s lives depend on your business continuity.

You need to take the time to sit down and look at your expenses to see where you must cut back given the current business environment.

4. Is renegotiating or at least getting a moratorium on some business loans or leases a possibility? – You’re a business owner and you’re asking yourself whether you ought to try to renegotiate loans or leases. The answer relies on a variety of aspects. You may be bumping up against your business credit limits and know you must try to reorganize your financial debt and cash flow.

It is certainly something that must be thought about since it for sure will certainly be if your business enters into an insolvency proceedings restructuring program with your creditors. So look critically at this option voluntarily. It may not be possible to achieve, but at least you will know that you have thoroughly canvassed the possibilities.

5. Is it possible to create a new cash flow stream using the existing skill sets and staff until the economy turns around? – It’s not uncommon for struggling businesses to experience cash flow problems. For example, a business owner who takes on too much debt may suddenly find themself paying far more interest than they can afford, and the business is now burning through money every month just to keep their creditors at bay.

Sometimes the business owner may simply have too many creative ideas and not enough time to take them to fruition; this can cause them to take on new projects before they can finish the ones they’ve already started.

Rather than focussing on many new projects, look at what new twist on what you already do can be implemented to meet current market demand just to bring in some additional cash from a new source. This may very well save your business until more permanent changes can be implemented and/or the marketplace and the economy turns around.

6. Take advantage of Canada’s COVID-19 Economic Response Plan for business – Canada’s COVID-19 Economic Response Plan is designed to help businesses by providing relief to companies that owe funds to Canada Revenue Agency, the banks or landlords. It is also intended to try to keep Canadians working. The Plan was introduced in 2020 in response to the pandemic and has been revised several times since then to help struggling businesses in Canada.

The Canadian government’s COVID-19 Economic Response Plan is designed to help the small and medium-sized businesses struggling to survive the impact of the economic downturn. The program offers business owners a chance to hit the refresh button on their business’s finances with a package of tax credits, interest relief and plain old money to help them with their outstanding debts. The program is designed to help all Canadian businesses in general.

I have written many blogs already on various Canadian government programs for business, such as the:

There’s been no spike in personal and business bankruptcies, but surge is expected

There are many businesses across Ontario considering bankruptcy as they sit on the sidelines from the COVID-19 financial impact, according to the Canadian Federation of Independent Business (CFIB).

“Businesses need to start making revenue again, otherwise they’re just not going to survive” said Ryan Mallough, CFIB’s Director of Provincial Affairs for Ontario.

As I previously reported in my Brandon Blog, Small Businesses In Canada Accumulate Massive Debt Due To COVID-19, since the start of the COVID-19 outbreak in March 2020, small businesses in Canada racked up $135 billion worth of debt to stay afloat.

Seven in 10 small businesses in Canada have actually borrowed money because of COVID-19. The average is almost $170,000 per business, according to a new survey released by the CFIB. In total, small businesses in Canada currently owe a cumulative $135 billion.

This is the perfect segue into my next Brandon Blog. I will be talking about what the insolvency proceedings and bankruptcy proceedings options are for businesses, be they a proprietorship, partnership or corporation. Based on the various business types, it will include business insolvency options for personal insolvency, personal bankruptcy, corporate insolvency and corporate bankruptcy.

That Brandon Blog will be of a more practical nature in how the various personal and debtor company business bankruptcy in Canada and insolvency options work.

I feel this is a good time to talk about this in my next Brandon Blog because right now the insolvency statistics show that notwithstanding the tough economic slowdown, insolvency filings are low. I don’t believe the insolvency rate is low, but right now federal government support is masking the true economic health of Canadian businesses.

Business bankruptcy in Canada summary

I hope you enjoyed the business bankruptcy in Canada Brandon Blog post. You may be very upset and frustrated over this. You may have been directly affected by the course and employee downsizing. Perhaps your pension has just been cut drastically from what you thought it would eventually be. You may even be downright depressed. No doubt the Sudbury entrepreneurs may be very frustrated whether their businesses will be able to continue to pay all their debts as they come due.

Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? Call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

business bankruptcy in canada