What to Do When Your Business Is Failing: 7 Decisions in the Order They Arrive

The decisions a failing business faces arrive in a sequence, and an owner who takes them out of order tends to pay for the mistake twice. Choosing between bankruptcy and settlement is a late decision. Deciding which bill the next dollar pays is an early one, and it constrains everything after it.

Seven decisions follow, in roughly the order they present themselves. The early ones are small and mechanical. The later ones are larger, and they are made well only if the early ones were made at all.

1. Stop New Borrowing Before Cutting Anything Else

The first decision is a refusal. A business losing money that accepts a new merchant cash advance to cover the debits of the last one has converted a cash shortfall into a second creditor with its own daily claim on the same account, and the renewal offers tend to arrive at the moment the owner is least able to evaluate them.

Consider, as a hypothetical, a shop depositing $50,000 a month that owes two advances debiting $450 each banking day. Over twenty-two banking days those debits total $19,800, nearly two-fifths of gross receipts, before rent or payroll has been paid. A third advance would not relieve that arithmetic. It would add to it.

What replaces new borrowing is a forecast: every expected deposit and every scheduled debit, week by week, written down where the owner can see it. The forecast will be wrong. It will be less wrong than memory.

2. Withheld Payroll Taxes Outrank Every Other Creditor

This is the decision owners most often make by default. The IRS calls withheld income and employment taxes trust fund taxes "because you actually hold the employee's money in trust until you make a federal tax deposit," and under 26 U.S.C. 6672 a responsible person who willfully fails to pay them over becomes personally answerable for the whole unpaid sum.

The funder can sue the company. The IRS can assess the owner.

Willfulness under the IRS's reading requires no bad motive, only intentional disregard or plain indifference, and paying other creditors while withheld taxes go unpaid is the example the agency gives. The penalty can be assessed while the business still operates. It survives the owner's personal bankruptcy. And no settlement company can negotiate it, because the only party with authority over it is the IRS, which offers installment agreements and compromises on its own terms and requires, among other things, that an employer be current on required deposits before an offer in compromise is considered.

A failing business that can pay only one creditor this week should, in almost every case, pay the deposit.

3. Triage Creditors by What Each Can Do Next Week

Creditors differ less in the size of their claims than in the speed of their remedies. Sorting them by that speed tells an owner where the pressure will come from first.

A secured lender with a lien on equipment may, after default, take its collateral without a court order, but under New York UCC 9-609 only without a breach of the peace, and only its collateral. A merchant cash advance funder may already hold authorization to debit the operating account, and some older New York files contain a confession of judgment, though since 2019 CPLR 3218 has permitted entry only in a county of the debtor's residence (for a business, any county where it has a place of business), a change that in practice shut New York clerks' offices to confessions signed by out-of-state merchants. A creditor that already holds a judgment can serve a restraining notice on the bank under CPLR 5222; a bank that holds back twice the judgment amount is free as to the rest, and the notice lasts up to a year.

An unsecured supplier without a judgment, by contrast, must sue and win before it can take anything, a process measured in months. The landlord sits somewhere between, depending on the lease and the state.

The triage has a boundary. An owner who stops an authorized debit through the bank should describe it accurately; labeling an authorized transaction as unauthorized to force a return (a tactic that circulates in some corners of the industry and which Nacha's return codes were not built to accommodate, since the codes for insufficient funds and for unauthorized entries mean different things and carry different consequences for the account holder who chose the wrong one) exchanges a commercial problem for a credibility problem with the bank and, eventually, with a court.

4. Decide Whether the Business Is Viable or Merely Overfinanced

Strip the debt service out of the forecast. If the business earns money before its obligations to lenders and funders, the problem may be the capital structure, and structures can be renegotiated. If it loses money even then, no negotiation will repair it, and the remaining decisions concern how it ends.

Whether an owner can see this clearly while the account is being debited every morning is a separate matter, and not one the forecast settles.

5. Engage Advisers Whose Roles Are Written Down

Free counsel exists before the paid kind. SBA's resource partner network offers free or low-cost counseling, SCORE mentors advise at no cost, and Small Business Development Centers provide help with financial and organizational problems. None of them negotiates with creditors.

A lawyer is necessary sooner than owners expect, because an LLC or corporation may appear in federal court only through licensed counsel, a rule the Supreme Court treated in 1993 as long beyond dispute. An accountant is necessary for the tax decisions. Each adviser's role, fee and authority should be in writing before the first document changes hands.

6. Choose the Route: Workout, Sale, Closure or Bankruptcy

Four routes remain, and they are not exclusive. A business can negotiate with some creditors while preparing a sale; it can close in an orderly way while resolving guaranties; it can file chapter 11 after a negotiation fails.

A workout suits a viable business whose debt is concentrated in a few creditors willing to deal. Delancey Street works on that route for merchant cash advance balances, beginning with a free, confidential review of the contracts and bank activity. None of that work is legal work: Delancey is not a law firm, files no bankruptcy petitions and appears in no court, and legal questions go to independently licensed counsel. No private negotiation produces an automatic stay, and no creditor is obliged to accept a proposal.

Bankruptcy is the better tool in some cases, and an honest review says so. A business facing several lawsuits at once, a creditor that refuses every proposal, or a need to bind dissenting creditors may require chapter 11, where the filing generally stops collection and a confirmed plan can bind creditors who voted against it. A business that is not viable may belong in an orderly closure or a sale, both of which have their own pages here.

7. Protect Personal Exposure Last, and Lawfully

List every guaranty the owner signed, every account on which the owner is jointly liable, and every tax period in which the owner controlled payment. That list is the owner's actual exposure, and it is usually shorter and more specific than the fear.

Do not sign new personal guaranties to buy a few weeks. Do not move assets to relatives; state voidable-transfer statutes let creditors challenge transfers made without fair value, and in a later bankruptcy, concealing property is a federal crime under 18 U.S.C. 152. The protection that holds is the kind made with a lawyer, in daylight, on paper the owner would be willing to show a judge.

Failing is a process, not a verdict, and the owner who attends to its order keeps more choices open than the one who attends only to its speed.