(Bloomberg) – Big companies are going bankrupt at an all-time high, but that’s only part of the carnage. Small businesses are reportedly disappearing by the thousands amid the Covid-19 pandemic, and the drag on the economy from these failures could be huge.
This wave of silent failures is innumerable in part because real-time data on small businesses is notoriously scarce, and because small business owners often have no debt, and therefore do not need a bankruptcy court.
“All you probably have to do is call the utilities and tell them to turn them off and shut your door,” said William Dunkelberg, who runs a monthly survey as the Federation’s chief economist. national independent enterprise. Nonetheless, the closures “are going to be way above normal because we are in dire economic straits,” Dunkelberg said.
Bark (NYSE 🙂 Inc., the online reviewer, has data showing more than 80,000 permanent closures from March 1 through July 25. About 60,000 were local businesses or businesses with fewer than five locations. According to the American Bankruptcy Institute, around 800 small businesses have indeed filed for Chapter 11 bankruptcy from mid-February to July 31, and the trade group expects the 2020 total to be up by 36. % compared to last year.
Although businesses are small individually, the collective impact of their failures could be substantial. Companies with fewer than 500 employees represent about 44% of U.S. economic activity, according to a report by the U.S. Small Business Administration, and they employ nearly half of all U.S. workers.
Justine Bacon has permanently closed her Yoga Brain studio in Philadelphia after deciding it was too dangerous to hold classes because of the pandemic. Bacon did not file for bankruptcy, it simply went out of business and filed for bankruptcy on June 30.
“I thought it was better to close with a little money in the account and not have to worry about bankrupting the business,” said Bacon, 35. As large companies seek court protection at an all-time high, countless smaller companies like Yoga Brain included in the official toll.
Chapter 11 bankruptcy gives a business protection from its creditors while owners develop a reorganization plan. For small businesses, however, the extra time may not make a difference. “Bankruptcy cannot create more income,” said Robert Keach, restructuring partner at New England-based Bernstein Shur and former president of the American Bankruptcy Institute.
Some homeowners worry that bankruptcy will ruin their credit reports and hurt their future chances of rebuilding. Bankrupt businesses have an almost 24 percentage point higher probability of being denied a loan, according to the SBA, and a record can appear on a credit report for 10 years.
This is one of Rebecca Schner’s concerns. Things were looking up for Schner, 51, and her jewelry and fair-trade store New Lotus Moon in The Woodlands, Texas. It opened in 2018 and finally started to break even earlier this year.
Then the virus hit. After the store closed to walk-in shoppers, she said sales dropped and she couldn’t cover the rent. She emptied the store around mid-May, put her jewelry boxes in a warehouse and fired her part-time employee. She makes minimum payments on nearly $ 50,000 in loans.
“What if I want to have a mobile store and buy a vehicle for it?” Can I get a loan? Schner said.
Loss of income
Certainly, small business attrition is high even in normal times. Only about half of all establishments survive for at least five years, according to the SBA. But the speed of the pandemic and the huge decline in economic activity are hitting the generally optimistic entrepreneurs hard. About 58% of small business owners say they are worried about the final closure, according to a July poll by the US Chamber of Commerce.
In a June 2020 NFIB survey, 31% of net owners reported lower sales in the past three months, while 7% reported higher sales a year earlier. In the same survey, just 13% of business owners said it was a good time to grow, down from 24% a year earlier.
Jose Gamiz, 45, and Leticia Gamiz, 52, closed their restaurant in Glendale, Ariz. On July 31. The bills started to pile up, and while thousands of government loans helped, they didn’t cash in enough. They had four part-time employees.
It was too risky to keep Mi Vegana Madre open, said Jose Gamiz. The couple knew the dangers of taking risks after losing the first home they bought during the 2008 crisis.
“We wanted to take this as a lesson,” said Jose Gamiz. “Sometimes it’s okay to give up and not spend every penny.”
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