Commercial bankruptcy levels are rising because small business fail rates are now soaring. Robert Lawless, a professor of law at the University of Illinois, said that the most filings are performed by entrepreneurs and small-business owners. Changing consumer shopping habits as a result of the economic downturn, poorly timed business expansion and rising food and gasoline prices are thought to be the main reasons behind the plummeting demand for local goods and services.
Commercial Bankruptcy Soars as Small Businesses Fail
During the first 5 months of 2014, there was a 52% rise in the number of small businesses filing for commercial bankruptcy. According to the Automated Access to Court Electronic Records (ACER), there were 36,103 filings compared to 23,829 this time last year. A total of 350 small businesses fail each day. the majority of companies are filing for chapter 11 bankruptcy so that debts can be restructured.
Chapter 7 or Chapter 11 Bankruptcy?
When small businesses fail, they often file for bankruptcy under chapter 7. This involves permanently shutting down the business and writing off all commercial debts. However, chapter 11 bankruptcy allows an entrepreneur to restructure any outstanding debt and offer a reduced payment to creditors. It works in a similar way to chapter 13 (which is the equivalent for individuals), but is far more involved than its commercial equivalent.
Small Business Loans Hard to Find
Small business fail rates are increasing at the very time that new business start-ups are declining. Financial institutions are being blamed for this problem for failing to offer small business loans. The National Federation of Independent Business trend report stated that 16% of business owners were finding it harder to get a business loan. This is the highest figure since the 1980-82 recession.
A reduced access to business loans, combined with lower credit card limits, have meant that chapter 7 or chapter 11 bankruptcy are their only option. The tightening of commercial bankruptcy laws has meant that small businesses now have far less time to restructure their debts. Financial difficulties needn’t mean the end for a business, but it is necessary to act quickly.