Bankruptcies in smaller businesses are on a precipitous rise. Higher interest rates and increasing operating expenses are taking their toll on smaller operators who don’t have deeper pockets or other means of keeping their businesses rolling.
The money from C-19 era relief vehicles such as PPP Loans, EIDL Loans, and Employee Retention Credits, left many entrepreneurs on a solid financial footing at the end of the pandemic. The problem is that for many of those operators, their businesses haven’t fully bounced back yet and that money is gone.
Smaller businesses are always the first to feel the effects of a bad economy. We don’t have huge cash reserves or the ability to raise fresh money by issuing more stock certificates or floating bonds in the open market. As such, the Fed’s actions to slow the economy always bite small businesses first.
The increase in the number of bankruptcies is coming from a new provision in the Bankruptcy Code named Subchapter V. Unlike a regular Chapter 11, this new provision eliminates the requirement that a debtor gain acceptance of a repayment plan from an impaired class. Subchapter V Debtors can confirm a plan without the consent of any creditors, providing that the plan is “fair and equitable” as defined by the Bankruptcy Regulations.
Almost 1,500 small businesses had already filed Subchapter V by the end of September this year. That’s almost as many of these filings that we had in all of last year, according to the American Bankruptcy Institute.
Increases in interest rates are one of the factors behind the increase. Most business loans are variable rate vehicles. I’m currently seeing clients paying interest rates on some of their loans that are in the double digits.
Labor prices have skyrocketed as well. Many entrepreneurs have seen 20% to 40% increases in this one input alone since the beginning of the pandemic.
And given the inflation rates, general operating expenses have also soared. Many haven’t been able to raise their prices fast enough to counter all of these changes. As such, the number of new bankruptcies are climbing.
Sadly, this trend probably won’t reverse itself in the near future.
Let me leave you with this.
I remember back at the beginning of the Subprime Mortgage Fiasco of ’08, when many of my younger MBA clients would lecture me on how leveraging a business was the only way to operate. These fledgling entrepreneurs with way too many letters behind their names would drone on and on about how debt was good, and how it was the only way to properly grow a small business.
Of course, these wunderkinds were the first wave of entrepreneurs to file bankruptcies back in those years.
I’ve stayed “friends” with many of them through the electronic wizardy of social media over the years. Sadly, many of them didn’t learn their lessons the first time around, and have since gone belly up making the same mistake another one or two times in the interim. The lesson from these examples is simplistic and all encompassing, which is…
It’s better to have a small business than no business at all.
If these entrepreneurs had been conservative in their planning and not gone too far into debt, they probably would have made it through the bad economies. They’d still be earning a living, taking care of their families, employing their workers, producing their products, and paying their bills.
But instead, they wanted to conquer the world. If it had only happened once, we could chalk it up to youthful exuberance, but sadly this wasn’t the case.
Now is not the time to go crazy. It’s time to be conservative. I’m going to say it again. Please, please , please listen.
It’s better to have a small business, than no business at all. I don’t want any of you to be forced to explore any chapter of the Bankruptcy Code, ever.
We’re all going to get through this. Let’s get through it together.
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