Business failures a tough transition Increase in filings point to warning signs

National polls continue to trumpet the health and vitality of Colorado, particularly Northern Colorado.
Within the past two years, virtually every major national business magazine and expert poll has singled out Colorado as having the nation˜s healthiest business climate.
The most recent poll issued July 9 by the highly respected, Washington-based Corporation of Enterprise Development declared Colorado and Washington to be in a dead heat for the nation˜s healthiest business climate. Colorado State officials termed the report the "most credible" among the many issued by various reporting agencies.
Paradoxically in such a healthy climate, bankruptcies are on the increase. In 1996, bankruptcy filings in the State of Colorado totaled 16,336. That number grew to 19,075 last year. This year, bankruptcies are on a pace to top 20,000 according to the clerk of the federal bankruptcy court for the District of Colorado. What˜s going on here?
"Capitalism is about risk," explained Jack Hautaluoma, Ph.D., an organizational psychologist and professor of psychology at Colorado State University. "In good times such as these, more capital is available to be risked. Psychologically, I suspect more people dare to try things when there is a general impression that things are going well. They want to get in on it."
The boom in economic activity these days is being led by entrepreneurial activity: smaller businesses, often established and operated by one person with only a handful of employees. In the new entrepreneurial economy that is rapidly replacing the manufacturing economy of the early part of this century, risk-taking is essential for the continued growth and health of the economy.
"Business is growing, but new businesses are smaller," Hautaluoma said. "The economy is booming, but it is riding on the shoulders of more smaller businesses than ever before."
Offering individual entrepreneurs and their smaller ventures access to capital gives the Ôaverage˜ person a better opportunity to start a small business and turn that risk into a Microsoft, a Yahoo or an EFTC Corp. Still, while risk carries with it great potential for reward, there is a great and predictable rate of failure for entrepreneurial ventures.
"Entrepreneurial activity is the engine for the economy," Hautaluoma said. "It makes things go. But startup businesses have a high failure rate that varies from 50 to 90 percent, depending on the nature of the business one is starting."
Most entrepreneurs experience financial drain and personal pain during the first months and years of even the most successful startups. But there is a difference between growing pains and drowning in the proverbial sea of red ink. Ending a business can take as much work and perhaps more courage than beginning one. When is a declaration of bankruptcy the best course of action?
"When you lose all hope," said University of Northern Colorado economist John Green. "That˜s not necessarily an economic decision. There is a lot of personal psychology involved.While the psychology of bankruptcy may be personal, the nuts and bolts are practical and often very public and stigmatizing.
"The person whose business is in trouble is going to keep spending and borrowing," Green added. "Every entrepreneur thinks his or her business is going to get better because businesspeople are basically optimistic. So, they are going to keep digging themselves into a bigger hole until they get a refusal from a major supplier or lender, until they get a rejection that shows them very clearly that the wall is directly in front of them. They need a shock."
Hautaluoma relates this requisite Ôshock˜ with the psychological principles of catastrophe theory, which states that "things have to go past the place where awareness normally would occur before there can be a phase change, a change in the person˜s state of being."
Even in these boom times, there is fertile ground for the success of publications such as the New York-based Bankruptcy Strategist. Its editors offer practical advice to those individuals and business owners facing the decision of whether to file for bankruptcy. Among the Ôwarning signs˜ it offers are the following:
n Your creditors stop extending your credit.
n A major supplier is no longer willing to provide you needed supplies.
n You have difficulty making, or cannot make, your rent or payroll.
n You begin to lose your personal credit cards.
When any of these circumstances begin, it is advisable to seek out the advice of a professional debt counselor or bankruptcy attorney.
Bankruptcy has become so commonplace nationwide that, in June, the federal House of Representatives approved a package of bankruptcy-reform measures.
Among them, individuals filing for liquidation under Chapter 7 of the U.S. Bankruptcy Code or seeking to pay back debts under a Chapter 13 wage-earner plan would be required to undergo debt counseling before being permitted to file. Most corporate reorganizations are filed under Chapter 11.
Though business bankruptcies may now be more commonplace, Hautalouma believes the personal changes that accompany the failure of a business may even be more severe than the changes that accompany the loss of a job, adding that "it is difficult to lose anything that takes away your whole identity. Losing your job is tough; but losing your store, your dream: that has got to be horrible."