Small to Mid-Sized Businesses Are Driving a Surge in Us Corporate Bankruptcies

Small and mid-sized businesses are facing significant challenges, with many already failing this year. In the first half of 2024, 346 companies filed for bankruptcy to either liquidate or reorganize, marking the highest half-year total since 2010 when 467 companies filed, according to S&P Global Market Intelligence. June alone saw 75 bankruptcies, the highest monthly figure since early 2020.

The majority of these bankruptcies are in the "consumer discretionary" sector.

"Consumer discretionary" includes businesses such as restaurants, clothing stores, and car dealerships—industries selling non-essential goods and services. Most of these struggling businesses are small to mid-sized, economists and investors told CNN.

High interest rates, the highest in nearly 25 years, are putting pressure on both consumers and businesses.

Small businesses, in particular, depend heavily on borrowing for equipment, inventory, payroll, and expansion. Access to credit is vital for these private firms, but it's becoming increasingly difficult to obtain business loans. A recent Federal Reserve Bank of Kansas City survey of 170 small businesses revealed that “credit standards tightened for the tenth consecutive quarter and credit quality decreased.” “Small companies are more at risk and more sensitive to higher borrowing costs,” said Matt Rowe, head of portfolio management and cross asset strategies at Nomura Capital Management. “The increase in implied and actual defaults that the S&P report is referencing is largely coming from the smaller cap part of the world.” "As businesses are closing, we're still seeing plenty of new ones being formed," he added. The Federal Reserve has maintained interest rates at a 23-year high for about a year to combat inflation. In positive news for borrowers, inflation began decreasing again in the spring after stalling earlier this year, potentially allowing the Fed to lower borrowing costs later this year.

Fed officials anticipate at least one interest rate cut this year.

While not providing immediate significant relief, would still be noteworthy. “Starting to cut rates is just as important for businesses and consumers as how much rates will ultimately be cut because it sets in motion the process of rate cuts,” said Reena Aggarwal, director of the Georgetown University Psaros Center for Financial Markets and Policy. “There’s an important psychological impact because businesses won’t have to worry about rates going up.” Small-cap stocks rose last week after the Consumer Price Index came in weaker than expected, strengthening the likelihood of rate cuts.

Our business bankruptcy practice helps businesses with all of their debt and insolvency needs in Chapter 7 and 11.

David is a certified specialist in bankruptcy law and has a background in finance and accounting.  The combination of those disciplines give him the ability to comprehensively evaluate complex business situations to determine if bankruptcy is the best solution, and if so, recommend what type would best pertain to the situation. Corporations have the option of walking away from and closing their businesses in Chapter 7 or attempting to reorganize their debts in Chapter 11.  Given the costs both in terms of time and money, most small corporations opt for Chapter 7.  Sometimes it may make more sense to not file bankruptcy on the corporate level especially if the owner has signed multiple personal guarantees.  Timing is also a key variable. David can assist with a schedule and strategy on when to close the doors, terminate employees, deal with lines of credit, including SBA loans and EIDL loans.