Common Reasons Why Companies Go Bankrupt

a person holding a bag

Bankruptcy is a term that describes a company or individual’s inability to repay outstanding debts. For the most part, bankruptcy offers companies a fresh start while allowing creditors to recoup some of their investments. If you have investments in a company that files for bankruptcy, getting your money back can be frustrating and daunting. That’s why many investors consider a company’s bankruptcy risk before making investment decisions.

A significant number of companies worldwide declare bankruptcy every year. There are a thousand and one reasons why companies go bankrupt. The following is a list of some common ones.

1. Not keeping up with changing market trends.

It’s well known that a significant proportion of new businesses fail within the first two years of operation. Companies that fail to conduct a thorough investigation of the market before starting operations run the risk of bankruptcy.

Market trends refer to the general direction of a market’s price. Many successful companies align their business operations in the same direction as the market trend. That way, they can profit from the continuation of that trend. Keep in mind that businesses need to be profitable to thrive.

Companies that operate without keeping up with changing market trends are susceptible to going bankrupt. Today, many companies are moving from traditional on-premise to cloud-based solutions. For example, successful businesses now use asset tags for equipment management to mitigate the disappearance, damage, or theft of valuable assets.

2. Not having a comprehensive business plan.

A realistic business plan is vital for the success of a business. The plan outlines measurable goals for the company, potential problems and solutions, and how the business can achieve those goals. Additionally, a comprehensive business plan outlines various strategies and timelines required to guarantee success.

Not having or deviating from a business plan potentially sets up a company for bankruptcy. No investor wants to hold a financial stake in a company with high bankruptcy risk. If the company goes bankrupt, the portion of your financial stake you’re likely to recover depends on the type of investment and type of bankruptcy proceedings. Essentially, there’s always a way out for both the creditor and the business owner.

Let’s say you own or hold significant investments in a company situated in Birmingham. Consider engaging the services of a Birmingham bankruptcy attorney to protect your interests. Keep in mind that bankruptcy attorneys are skilled legal professionals that specialize in providing representation and advice to companies on the verge of bankruptcy.

3. The business is currently facing a liquidity crisis.


Liquidity refers to the ease with which companies convert assets or security to cash without impacting their market price. Cash is inarguably the most liquid asset any business can have, given that it can be quickly converted into other valuable business assets.

A liquidity crisis is primarily a financial situation where a business lacks enough liquidity to run its operations. For the most part, the company tends to experience a rapid increase in demand and a significant decrease in the supply of liquidity.

Essentially, when a once solvent company doesn’t have enough liquid assets required to cover its short-term obligations, it faces a severe liquidity crisis. These short-term obligations may include operational costs, employee salaries, and debt repayment.

Not having enough cash or liquid assets to meet your obligations ultimately results in widespread defaults. Nine times out of 10, the company eventually goes bankrupt and declares bankruptcy. Keep in mind that creditors and investors will continue to demand repayment and dividends regardless of the state of the business.

Furthermore, companies suffer liquidity problems in response to an economic shock. Take, for example, the COVID-19 pandemic, which affected many businesses across different sectors. Little wonder many of those businesses went bankrupt.