The rise in small business bankruptcies and financial struggles, as reported by The Wall Street Journal (WSJ), appears to be influenced by several factors, with rising interest rates being a key driver.
The increase in small business bankruptcies is particularly notable in filings under Subchapter V of the bankruptcy code. Subchapter V is a relatively recent provision that makes it easier for small businesses to restructure their debts. According to data from the American Bankruptcy Institute, nearly 1,500 small businesses filed for bankruptcy under Subchapter V in the first nine months of 2023, which is almost as many as in the entire previous year.
The report also highlights that defaults and delinquencies on small business loans have been on the rise since June of the previous year and have now exceeded pre-pandemic averages. This information is based on data from Equifax.
Unlike larger companies, small businesses often face limitations in raising capital. They cannot issue stock or attract funding sources like private equity investors. This can leave them more vulnerable during economic challenges.
Small business owners, such as Jason Adkins, owner of Brighthouse Green Home Cleaning in Nashville, Tennessee, have expressed the critical nature of these challenges. For many, it’s a matter of business survival, and they may not have the financial resources or assets to navigate such crises.
Data from the Kansas City Federal Reserve indicates a decline of 17.7% year over year in loans for small businesses as of May. This suggests that access to financing has become more difficult for many small businesses.
A study titled Main Street Health Q1 2023 found that a significant portion of Main Street businesses across the U.S. lacked access to emergency funding. Only 26% had access to the equivalent of at least 60 days’ worth of revenue, and 17% had no ready access to emergency funding at all.
The data suggests that a significant portion of small businesses are turning to personal credit cards (roughly one-third) for funding, while only 17% are obtaining financing from traditional banks.
These trends indicate that small businesses, which often serve as the backbone of local economies, are facing significant financial challenges due to factors such as rising interest rates, limited access to funding sources, and increased loan defaults. These challenges can have cascading effects on employment and economic stability within communities.