Small Business Bankruptcies Jump as Capital Grows Scarce

Rising interest rates have reportedly helped fuel a spike in small business bankruptcies.

As The Wall Street Journal  (WSJ) reported Sunday (Oct. 1), the jump is being driven by filings under Subchapter V of the bankruptcy code, a relatively recent provision making it easier for small businesses to restructure.

The report, citing data from the American Bankruptcy Institute, says that almost 1,500 small businesses filed for bankruptcy under Subchapter V in the first nine months of 2023, almost as many in the whole of last year.

In addition, defaults and delinquencies on small business loans have crept upwards since June of last year and now exceed prepandemic averages, the WSJ said, per Equifax data.

The WSJ quotes Soneet Kapila, a bankruptcy trustee and president of the bankruptcy institute, who notes that — unlike larger companies — small businesses can’t issue stock or seek out funding sources like private equity investors.

That was the case for Jason Adkins, owner of Brighthouse Green Home Cleaning in Nashville, Tenn., which filed for bankruptcy earlier this year.

“It was life or death in terms of the survivability of the business,” said Adkins, who has 85 employees. “I don’t own a portfolio of businesses. I can’t pull from assets.”

It’s a situation PYMNTS has been tracking for several months. As reported here in May, findings from the Kansas City Federal Reserve showed loans for small businesses declining 17.7% year over year. And 9% of small and midsize businesses (SMBs) say they had a tougher time securing their last loan compared to previous attempts.

Meanwhile, the PYMNTS Intelligence/Enigma study Main Street Health Q1 2023 found that just 26% of Main Street businesses across the U.S. had access to the equivalent of at least 60 days’ worth of revenue, while 17% had no ready access to emergency funding at all. 

“Fully half of construction firms say they have access to less than 30 days’ worth of cash; about 45% of hospitality firms say the same,” PYMNTS wrote earlier this year. “These businesses depend on large-ticket spending from end consumers, and are seasonal — and are certainly brick-and-mortar, which means that operating costs are high, too.”

In terms of where these small businesses are getting their funds, the data shows that roughly one-third are tapping into personal credit cards, with just 17% getting financing from banks.