It Trickles Down
According to Equifax, the rate of bankruptcy filings among small businesses is skyrocketing; on average, 350 new filings per day, an increase of 52% as compared with the previous year. Part of the problem is the trickle down effect, as when large corporations such as General Motors file for bankruptcy, they cancel contracts and discharge debts they owe to their suppliers. The 2005 revisions to bankruptcy laws are much tougher on small businesses than on larger corporations, which are often the genesis of the small business’ financial difficulties! Even worse, in today’s tough economy, even those corporations that are going concerns are often in arrears in paying their suppliers. According to the Equifax bankruptcy study, the largest run-up in bankruptcy filings is driven by the transportation industry, which includes the troubled automobile and airlines businesses. The transportation industry is followed by the construction, manufacturing and retail industries. The stress can be seen in local trends, with small business bankruptcy filings increasing the most in Los Angeles and Chicago. Local unemployment is a major contributor to small business bankruptcies. Lack of access to credit appears to be accelerating the trend, as small businesses can no longer borrow working capital until times improve. Small businesses that supply discretionary services, such as restaurants, child-care facilities and entertainment, are at particular risk as consumers cut back such expenses in a recession. Rising prices, particularly in core commodities, such as gas and food, are contributing to the problem. And fewer people are starting new small businesses to replace the failed ones. For small businesses that see no way forward, a Chapter 7 bankruptcy allows for an orderly liquidation and discharge of debt. If it is possible to reorganize the business or sell it as a going concern, Chapter 11 may be the better option. These are tough times, indeed.