Small Business Bankruptcy on Pace for Worst Year Since 2010: This Industry is the Worst

Small and mid-sized businesses are facing significant challenges in 2024, with a notable increase in bankruptcy filings. In the first half of the year, 346 companies filed for either liquidation or reorganization through bankruptcy, marking the highest half-year level since 2010, according to S&P Global Market Intelligence. June alone saw 75 companies filing for bankruptcy, the highest monthly total since early 2020.

The majority of these bankruptcies are within the "consumer discretionary" sector, encompassing businesses such as restaurants, clothing stores, and car dealerships. These businesses are typically small to mid-sized and are particularly vulnerable in the current economic climate.

High Interest Rates and Tightened Credit

One of the primary pressures on these businesses is the high interest rates, which are at their highest level in nearly 25 years. This situation is straining both consumers and businesses that depend on borrowing for essential operations like purchasing equipment, replenishing inventory, meeting payroll, and expanding operations. Small businesses, in particular, struggle as they cannot easily raise money through financial markets and face increasing difficulty in securing business loans.

Increased Risk for Small Companies

Small companies are more susceptible to higher borrowing costs, leading to a rise in defaults. Experts believe that the increase in both implied and actual defaults is predominantly affecting smaller companies.

Declining Consumer Demand

Consumer demand has been lackluster this summer, further impacting businesses. The Institute for Supply Management's latest survey indicates that U.S. consumers are spending more cautiously compared to last summer. This cautious spending is problematic as the summer season is crucial for many service-providing businesses. Recent bankruptcies, including an arcade and a hotel management company, also cite supply-chain issues as contributing factors.

These combined pressures—high interest rates, tightened credit, and cautious consumer spending—are creating a challenging environment for small and mid-sized businesses, pushing many to the brink of bankruptcy.

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