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

In the second half of 2022, Sweden had its highest number of bankruptcies in ten years. Professor Marie Karlsson-Tuula believes that many of these bankruptcies could have been avoided. Here are her top tips for small business owners at risk of financial problems.

First a pandemic, then war in Europe, increased electricity, fuel and interest costs, and then high inflation and recession on top of that. The last few years have been extremely stressful for many businesses, and several have been forced to file for bankruptcy.

– As an entrepreneur, you cannot control external factors. But there are internal factors that you can actively work with to develop the profitability of your company, says Marie Karlsson-Tuula, Professor of Civil Law at University West.

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 concluded for very long periods, making the premises expensive. This is a very common problem, and property owners are often less inclined to conciliate to reach 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 matter of producing too little or too much of your product.

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, people stare at me gaping when I tell them that bankruptcy in Sweden is shameful and tantamount to failure. They don’t understand what I’m talking about. There, bankruptcy is only seen as a merit, because the experience can be used in a new business, 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 to give entrepreneurs early warning of how their business is 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 entered into force on September 1, 2022, there have been few applications. Only 30 companies have applied for restructuring between September 1, 2022 and January 31, 2023. Previously, there were around 500 applications per year. The sharp decline is probably due to the tightening of the law. The requirements for reorganizers have increased, they must be lawyers with their own office organization and their own staff.

– Companies are also subject to more stringent requirements in restructuring. They must prove that they can regain the viability of their business through a restructuring procedure. The process has become more administratively cumbersome and costly, which means that most companies instead make a financial settlement with their creditors, says Marie Karlsson-Tuula.

TIPS FOR TOUGH TIMES

– Make sure that an advisor regularly reviews the financial flow of the company. Start with Almi Företagspartner, they give all types of companies a few hours of free advice.
– Ask uncomfortable questions like: What are we doing? Are we doing the right things? What is our production, should we sell smaller volumes? Or bigger? Are all employees needed? Is there demand for our products/services? Is it time to change the focus of our business? If demand has dropped – what could be the reason?
– If costs need to be reduced, start by cutting the heaviest items of expenditure, such as staff and premises.
– If you are in serious financial trouble – contact all your debtors (creditors) and ask them to reduce their claims. It’s better for them than your business going bankrupt.
– If bankruptcy is unavoidable, you go to the District Court to file for bankruptcy.
– If your business went bankrupt – don’t feel ashamed! It is an experience that will strengthen both you and your business in the long run.

Contact marie.karlsson-tuula@hv.se

Contact Almi for free advice on the financial situation of your company

Read more about how bankruptcies work

More about Marie Karlsson-Tuula
Marie Karlsson-Tuula is a PhD and Professor of Civil Law at University West. Her research interests include central property law, especially in the field of insolvency law, and is particularly interested in corporate reorganizations in both Swedish and American law. She also conducts research on financial crime. Marie is the founder and publisher of Insolvensrättslig tidskrift and the Academy of Insolvency and Property Law.