BANKRUPTCY: Professor’s 6 tips for small business owners in tough times

In the first half of 2024, around 6,000 Swedish companies went bankrupt – an increase of almost 40% compared to the previous year. Professor Marie Karlsson-Tuula believes that many of these bankruptcies could have been avoided. Here, she offers her top tips for small business owners to get through difficult times.

It started with the pandemic. Then came war in Europe, followed by rising electricity and interest costs, high inflation and a recession to boot. The last few years have put extreme strain on many businesses, with several having to file for bankruptcy. In June 2024, 915 companies went bankrupt, a 67% increase compared to the same month last year. This is the highest number of bankruptcies in June since 1996.

Marie Karlsson-Tuula, professor of civil law at Linnaeus University, says that not everyone who was affected had to go bankrupt.

– As an entrepreneur, you cannot control external factors. But there are internal factors that you can actively work on to develop the profitability of your company.

Important to investigate the causes

She has extensive experience in studying bankruptcies and business reorganizations, and believes that if you get into financial trouble, you need to look at the causes.

– Often in the excitement of setting up a limited company, leases are signed for long periods, making the premises very expensive. This is an all too common problem and property owners are often less inclined to negotiate to find a solution.

– It should be borne in mind that landlords often want to conclude agreements that benefit themselves. The entrepreneur is often in a difficult negotiating position. Therefore, my recommendation is to reflect on the contracts concluded and try to negotiate better contractual terms for all contracts concluded in the business.

Other common internal factors that can cause financial problems are having hired too many staff, or that your products/services are no longer in demand on the market. It can also be a case of producing too little or too much of your product, which may not be as much in demand as before.

The shame is great – burying your head in the sand

But according to Marie Karlsson-Tuula, too few companies do a thorough analysis of the causes of their financial situation. Many are afraid of going bankrupt and feel great shame at ‘failing’ in their business.

– No one wants to go to their own funeral, so the strategy is to bury your head in the sand and hope for the best. This is true for far too many people.

She believes that this should not be the case.

– In the United States, American professors of insolvency law look at me in surprise when I tell them that bankruptcy in Sweden is something that is shameful and tantamount to failure. They do not understand what I am talking about. In the US, bankruptcy is seen as a merit only, because the experience you have gained can be used in a new business that is started up and experience means that you can develop better, says Marie Karlsson-Tuula.

Early warning system saves companies in crisis

Many European countries, including Denmark, have an early warning system for entrepreneurs. This is a system in which the government provides trained consultants who review the business free of charge. The aim is for entrepreneurs to receive signals at an early stage about how the company is actually doing financially.

– This way, measures can be taken in time and save many companies from bankruptcy and financial problems. “In Sweden, authorities and banks have similar systems, but they seem to be aimed more at private individuals than at entrepreneurs, says Marie Karlsson-Tuula.

Is restructuring an option for small businesses?

– Since the new law on corporate restructuring came into force on September 1, 2022, applications have been few. Up to September this year, 120 applications were received by Swedish courts, which is a 40% decrease compared to previous legislation. Many companies that could be restructured instead go bankrupt.

– The new law imposes higher requirements on companies when applying for a business reorganization. To be granted a restructuring by the court, the entrepreneur must show that they can regain the viability of their business. The process has also become more administratively cumbersome and costly, which has led most companies to opt for a financial settlement with their creditors instead,” says Marie Karlsson-Tuula.

Contact marie.karlssontuula@lnu.se