Bankruptcies are skyrocketing — and that’s only half the story
There isn’t an official recession, yet. But regardless, a large — and growing — number of U.S. companies are declaring bankruptcy, based on numbers from various sources.
(This column originally appeared in The Hill)
According to a new report from S&P Global, the number of companies that have gone bankrupt so far in 2023 is higher than the first four months of any year since 2010. Filings through April have pushed the year-to-date count to 236 — more than double the comparable figure a year ago and higher than any of the prior 12 years. Leading the way were companies selling directly to consumers ( Bed, Bath & Beyond being the most notable), followed by industrials and then financial services.
Another service that tracks bankruptcies reported that year-over-year commercial bankruptcy filings through March were up 24 percent, and that commercial Chapter 11 reorganization filings increased 79 percent. According to statistics released by the Administrative Office of the U.S. Courts, total bankruptcy filings rose just 2 percent compared to cases in the previous year but business filings increased 9.9 percent.
The good news is that these numbers are still lower than pre-COVID. But the bad news is that they’re growing — and it’s yet another conflicting metric that’s baffling economists. GDP has been growing (although slowing). Unemployment is at a 50-year low. Consumer spending has stayed the course. Companies in the services industries are doing well. Travel has recovered from the pandemic.
Why so many bankruptcies? The answer is one word: capital.
Regardless of an economy’s growth, capital is needed to run businesses. Working capital. Equipment and property financing. Cash flow to buy inventory and pay salaries. And unfortunately that capital has become much, much more expensive, and much less available.
Just a little over a year ago the Federal Funds Rate — that is, the rate the Fed charges its member banks for money — was at less than 1 percent. Now it’s over 5 percent. That’s a jump of more than 20 times! Never in recent memory have interest rates grown so much and so fast. Some banks, notably Silicon Valley Bank, were so surprised by the quick change of monetary policy that they couldn’t keep up and folded. And now businesses are starting to feel the heat.
The prime rate (the rate that banks charge their best customers) is now at 8.25 percent. My typical client — a small or mid-sized business — normally pays 1 to 3 percentage points above that, assuming they qualify for financing at all. So the cost of capital has skyrocketed for them, and it’s causing them to pull back on spending and investments.
I have other clients, primarily startups and emerging companies, that are finding it very hard now to get loans. And it’s not just my client base having this problem: bank loans and approvals to small businesses through April have “plummeted” according to recent monthly data from fintech company Biz2Credit.
“While it is good news that people are working, the tight labor market hurts the bottom line for small businesses,” said Rohit Arora, the company’s CEO. “Companies that need working capital to pay their bills are paying a higher cost of capital for it. This combination puts stress even on small businesses that are thriving. It’s a Catch-22 situation right now.”
What’s more, all the COVID cash, including SBA loans, grants and tax credits, are now expired or winding down. So the companies that were riding this cash in the hopes of catching a better wave are now out of luck.
All of this means that the bankruptcy numbers above are unfortunately only half the story. These numbers are from surveys and court filings and only include those companies that have gone through the trouble of officially declaring bankruptcy. If you look closely at these companies, you’ll see that they’re pretty large — at least large enough to be able to afford expensive bankruptcy attorneys and stave off their creditors for a potential reorganization. But what’s not included are the countless small businesses that are also likely failing right now.
With small business confidence at a 10-year low, it’s not unlikely that there are many bankrupt firms that remain unreported. Despite recent changes made to the bankruptcy laws to make it easier, quicker and less expensive for some small businesses to reorganize, many of them simply give up the ghost, shut their doors and walk away, or they fold one losing company to start another. The smarter ones figure out a way to pay their suppliers unofficially with the hopes of salvaging relationships for the future.
Because there’s little data on these failed companies, I can only be anecdotal when I warn that this is happening. But given what I see, and the fact that so many bigger companies are folding, it’s reasonable to assume there are many smaller firms having the same troubles.
None of this is news is good going forward. The economy is still officially not in a recession — if all these bankruptcies are happening now, what happens when we actually are in a recession? Buckle up, people.
Originally published at https://thehill.com on May 20, 2023.