Statistics Show Decrease in Small Business Bankruptcies

The latest numbers from Equifax, a credit rating organization based in Atlanta, Georgia, show that small business bankruptcy filings decreased in the first quarter of 2011 compared to the same period in 2010. Down 15 percent from last year, the first-quarter small business filings were still higher than those in the first quarter of 2008, before the recession hit.

For the purposes of its statistics, Equifax considers a small business any corporation with 100 employees or fewer. Here’s a look at what these numbers might mean for the larger economy.

Small-Business Bankruptcy & Economic Recovery

Small business bankruptcy filings might affect the economy in a number of ways:

• Jobs: When small businesses file for Chapter 7 bankruptcy, they liquidate and cease to exist. That means that any employees of that business become unemployed and enter the job market. A Chapter 11 bankruptcy means reorganization for a small business, but some employees could still be made redundant, especially in smaller operations where salaries are among the largest expenses business owners have. While it might not seem like a small business could have a big impact on the unemployment rate, consider this: about 38 million Americans work for companies with fewer than 100 employees.
• Local economies: In many parts of the country, small businesses give a town its individual “flavor.” Liquidation bankruptcy by these businesses might hurt a local economy by removing a draw for tourists or out-of-towners; however, a successful reorganization could mean more-booming business in the future.
• Real estate: In an admittedly less direct way, small-business bankruptcies could affect a place’s real estate market. Empty storefronts drive down real estate prices. This can be good if other businesses fill in right away, but could be bad if multiple businesses close down in the same area. Similarly, if an area’s businesses are failing and its residents are losing work, they may move to greener pastures, leaving their houses empty and potentially driving down residential real estate prices, as well. If few businesses exist to attract potential buyers, the problem could persist.

The Cycle of Small-Business Bankruptcy

One of the most difficult parts of a slow economy is its potential to lead to unhealthy economic cycles: when people are worried about jobs and money, they tend to save more and spend less (and, in fact, numbers have shown that the U.S. savings rate is much higher now than it was pre-recession).

When people aren’t spending money, though, the economy has a hard time getting started (as much as two-thirds of the U.S. GDP is made up of consumer spending). Small businesses, which have shallower reserves of cash, may not be able to attract the customers they need to stay afloat.

When local businesses fail, more people lose jobs and fight to save money, knowing they’ll need it if they cannot find work right away.