Small business bankruptcies are at a much higher pace than any year since the Covid pandemic.
The Wall Street Journal reports There’s No Soft Landing for These Businesses
Nearly 1,500 small businesses filed for Subchapter V bankruptcy this year through Sept. 28, nearly as many as in all of 2022, according to the American Bankruptcy Institute.
Bankruptcy petitions are just one sign of financial stress. Small-business loan delinquencies and defaults have edged upward since June 2022 and are now above prepandemic averages, according to Equifax.
An index tracking small-business owners’ confidence ticked down slightly in September, driven by heightened concerns about the economy, according to a survey of more than 750 small businesses. Fifty-two percent of respondents believed that the country is approaching or in a recession, said the survey by Vistage Worldwide, a business-coaching and peer-advisory firm.
Robert Gonzales, a bankruptcy attorney in Nashville, said he’s now getting four times as many calls as he did a year ago from small businesses considering a bankruptcy filing.
“We are just at the front end of the impact of these dramatically higher interest rates,” Gonzales said. “There are going to be plenty of small businesses that are overleveraged.”
Five Reasons for Surge in Bankruptcies
- Rising Interest Rates
- Surging Wages
- Tighter Bank Credit
- Overleverage
- Work-at-Home Curtailing Demand
Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
The Fed has hiked interest rates to 5.25% to 5.50%. It’s the highest in 22 years.
And Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
Surge in Wages
Minimum wages have surged. Unions are piling on. Small businesses have to offer prevailing wages or they cannot get workers.
In California, Minimum Wage for Fast Food Workers Jumps 30% to $20 Per Hour. Governor Gavib Newsom called it a “big deal”, I responded:
A Big Deal Indeed, Expect More Inflation
Yes, governor, this is very big deal. It will increase the cost of eating out everywhere.
The bill Newsom signed only applies to restaurants that have at least 60 locations nationwide — with an exception for restaurants that make and sell their own bread, like Panera Bread (what’s that exception all about?)
Nonetheless, the bill will force many small restaurants out of business or they will pony up too.
30 Percent Raise Coming Up!
If McDonalds pays $20, why take $15.50 elsewhere?
The $4.50 hike from $15.50 to $20 is a massive 30 percent jump.
Expect prices at all restaurant to rise. Then think ahead. This extra money is certain to increase demands for all goods and services, so guess what.
Other states will follow California.
Biden Newsome Tag Team
Biden’s energy policies have made the US less secure on oil, more dependent on China for materials needed to make batteries, fueled a surge in inflation, and ironically did not do a damn thing for the environment, arguably making matters worse.
See The Shocking Truth About Biden’s Proposed Energy Fuel Standards for discussion of the administration’s admitted impacts of Biden’s mileage mandates.
Newsom is doing everything he can to make things even worse.
The tag team of Biden and Newsom is an inflationary sight to behold.
Bank Credit and Over-Leverage
In the wake of the failure of Silicon Valley Bank, across the board small regional banks are curtailing credit.
The regional banks over-leveraged on interest rate bets. And businesses overleveraged too, getting caught up in work-from-home environments that curtailed demand for some goods and services.
The bankruptcies will fall hard on the regional banks.
Add it all up and things rate to get worse.
Missed one other big factor – new businesses formed.
New business formation the last 3 years was very high by historical standards. Since a very large proportion of new businesses fail rather quickly, a rise in failures was also predictable.
When looking at the rise of a particular phenomenon, you should also always look at the size of the pool that the statistic draws from. If the pool itself is growing, you have to account for that when attributing causation to other factors.
Sincerely,
Your Stats 101 Class
What are you basing this off? The birth death model that the BLS uses to make employment look better than it really is?
Maybe the economy is a lot worse than the government’s leading us to believe.
We need $1.5T injection yearly just to pretend it is staying even…..LOL
Recessions and resulting bankruptcies are just a part of the business cycle. Cleans out those businesses that shouldn’t be in business anyway, because of over leverage, poor business models, oversaturation in their markets, poor management and so on.
Government Motors comes to mind.
Recessions are mostly caused by Fed Policy of easy money, wealth creation, and then blow it up so the rich can buy stuff up on the cheap…..it is not a natural cycle the way it is being played since 1913 and then especially since Nixon
Wouldn’t necessarily say 1913.
But for sure ever since FDR demonstrated spending BIG time with borrowed money.
stagflation was always in the cards past year. probably last a good 5 to 10 years, too.
“If McDonalds pays $20, why take $15.50 elsewhere?”
Because you can no longer get a job at McDonalds since the higher wage attracted better candidates than you.
And McDonalds is a crappy place to work. Used to be fast food was where 16 year old’s got their first job. They would quit after a few months because the jobs were horrible, but they got some work experience.
And that’s the way it was supposed to be.
The manager was meant to be the only person in their 20’s and making a living. Everyone else was meant to be teens working their first or second job.
Or automation of the food service industry becomes affordable due to higher wages!
Food prices are through the roof to and that has added a substantial burden to the restaurant busnesses. I always ask local businss owners how business is going. Most end up complaining about the quality of the work force. This site already ran an article on productivity… there you have it showing up all over the country.
1) More places will start baking their own bread ?
2) Less people will tip and the others will tip less ?
3) Lots of staff will be fired as customer numbers decline sharply ?
4) More restaurants can be expected to close permanently ?
My significant other is struggling to get her small business off the ground; however, she will NOT go to any business events in high crime areas just to get sales.
Its OK to say “my wife”
Not if he doesn’t like that moniker.
That’s a pretty bad chart; show a few years before 2020 to see the real picture. And add to the list of factors that bankruptcies had to go up once government Covid largesse dried (mostly) up.
Small businesses are under pressure due to a change of character since Trump
rents deferral, PPP loans, tsunami of money….when the competition was gone.
If u need a $50,000 loan get a teaser rate. Banks wouldn’t talk to u unless u need a few millions.
Off Topic: Since more than once Gavin Newsom has said he will replace Dianne Feinstein’s Senate seat with a black woman, Meghan Markle’s name has suddenly popped up. I admit that Senator Markle would certainly add quite a bit of colorful drama to the “world’s greatest deliberative body”.
He picked a black lesbo who lives in Maryland. Not sure if these things are done to mock the constituency.
Yeah I find it very weird that he could not find a black lesbian who lives in California.
Should we congratulate Maryland for having 3 senators?
No. We have 3 bad senators now. They always vote along party lines. We could replace them with a simple algorithm.
I’ve read that Adam Shiff wanted the spot. Now he’ll have to run against a candidate he can’t call racist or sexist. What else do democrats have to run on?
Indeed part of their psy-op is, via mocking and abuse
1) Learned helplesness
2) Stockholm Syndrome
using several other key aspects of the torture known as MKUltra.
“Five Reasons for Surge in Bankruptcies”
I would offer you left out “labor shortages” as a key reason driven by demographics. The Kansas city fed has a release out on labor constraints and the impact on food, especially fast food restaurants.
link to kansascityfed.org
Agree with exception of higher wages. The instances that contributed to the BK someone who can afford the wages will fill demand. Workers make about the same to 5% less in inflation adjusted wages range 40 years ago so too bad.
Don’t forget, COVID EIDL repayments started. The choice for any business that borrowed less than $200,000 is to pay back a loan (does that ever happen) or close the business with no personal liability for the loan (it gets referred to the Treasury and Treasury only tries to collect from the closed business)
Indeed, who would spend the money to go bankrupt, if you could just close the business and walk away?
In other words, the DEAD businesses are much higher than indicated by bankruptcy data