When a company finds their debt service difficult to honor or if the promises made to creditors get broken the company is then in financial distress. There are many costs associated with financial distress and if a company cannot relieve this condition business and personal bankruptcy may result.
The Cost of Financial Distress
Attention to management and operation of a company is reduced and diverted to handle the numerous issues that arise from a high debt burden. The cost of acquiring capital increases and can only compound the heavy debt service.
If business bankruptcy is the result of financial distress then there are many fees attached such as:
- Legal fees
- Lawyer fees
- Management fees
- Auditor fees
Companies do not often survive business bankruptcy, and small businesses are finding it difficult even to raise the funds to pay for the filings. The Wall Street Journal ran a story in March of 2018 called, “Bankruptcy Is Often Too Costly for Small Businesses, Senate Panel Hears”