President Joe Biden touted the growth of new small business applications during a December 20 event at the Wisconsin Black Chamber of Commerce in Milwaukee. He immediately began his remarks by quoting his father saying a job is about dignity. But the purpose of the visit was to champion a record 15 million applications to launch companies since Biden became president. “Since Kamala and I entered office, America has filed a record number of — in less than three years, 15 million new applications to start new businesses,” he told the crowd. This is an exceptional figure that highlights the entrepreneurial spirit in America. As is usually the case, he omitted another trend that could threaten the narrative: bankruptcies.
Small Business Bankruptcies Rising
According to the American Bankruptcy Institute (ABI), small business bankruptcies are on the rise, soaring 79% year-over-year in November. Known as Subchapter V, these filings have outpaced submissions from a year ago and are climbing at the worst pace since the coronavirus pandemic, with more than 1,700. Overall, commercial Chapter 11 bankruptcy filings spiked at an annualized rate of 141%. Total bankruptcy filings rose 21% year-over-year in November to nearly 38,000.
“The rebound in filings seen this year is a reflection of the challenging economic environment resulting from the evaporation of pandemic responses, including government stimulus, low interest rates and looser lending terms,” said ABI Executive Director Amy Quackenboss in a statement. “Bankruptcy provides a reliable beacon to consumers and businesses struggling to navigate the financial terrain of higher interest rates, tighter lending terms and elevated pricing.”
Unfortunately, small business bankruptcies are just one indicator of financial distress in the marketplace. Recent Equifax data show an increase in small business loan delinquency and default rates amid higher borrowing costs, though St. Louis Fed data suggest the overall delinquency rate on all business loans is at a five-year low of 0.95%. Meanwhile, Brook Gotberg, a visiting law professor at the University of Chicago, recently told The Wall Street Journal that 90% of small businesses that close their doors happen outside of bankruptcy. This makes sense, too, considering the exorbitant costs owners have incurred over the last couple of years, be it labor or utilities.
The financial pressures these smaller outfits endure might explain the pessimism on Main Street. Owners expecting better business conditions over the next six months stood at a net negative rate of 42%, according to the National Federation of Small Business (NFIB). Indeed, borrowing costs will remain elevated heading into 2024, electricity is still surging, and the labor market is tight. It is a tough environment in which to own and operate a firm, regardless of size.
Despite the president championing the small business community and telling entrepreneurs that his policies have helped them, polling data show that they disapprove of how Biden handles the economy. A November CNBC-SurveyMonkey Small Business Survey found that President Biden’s approval rating among small business owners plunged to an all-time low of 30%, down from 43% when he arrived at the White House.
“Small business bankruptcies can often be the canary in the coal mine indicating a coming economic downturn. While an increase in small business failures is always a concern, there are other variables that are factoring in,” said Greg McBride, the chief financial analyst at Bankrate. “Labor shortages, a rapid snapback in demand post-pandemic, and surging inflation mean some businesses never fully regained the footing they had prior to the pandemic.”
Zombie Lives Matter
Bankruptcy is coming for zombie companies, too. In the first nine months of 2023, more than 500 zombie firms filed for bankruptcy, says S&P Global Intelligence. Before you ask what these are, they are unprofitable entities that exist mainly by taking on new debt. They represent approximately 10% of all US companies. Thanks to pandemic-era stimulus and relief packages and the Federal Reserve slashing interest rates to nearly zero, many have survived. However, now that the era of cheap money could be over – at least temporarily – financial institutions are unlikely to approve favorable extensions of credit to these unviable businesses.
Are They Successful?
It is said that 20% of all new businesses fail in their first year. After about five years, only half of these companies are still standing. Any individual can walk into a government office and submit an application to open a business. But how are they doing a year or two later? In other words, success rates matter. So, out of the 15 million small business applications filed since 2021, how many of these organizations remain? President Biden does not know. At least he mentioned Bidenomics for the first time in weeks!