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The recent surge in U.S. bankruptcy filings by small businesses indicates that rising interest rates, strict lending standards, and rising operational costs are putting pressure on business owners. In addition, certain government support programs that previously assisted them during the Covid-19 crisis have been terminated.
Small businesses are particularly affected by the Federal Reserve's methods of controlling inflation, such as interest rate hikes, due to their thin profit margins and limited cash reserves. While bankruptcy filings are clear signs of financial trouble, other indicators, such as rising loan defaults and small business delinquencies, are above the pre-pandemic average. In addition, a survey indicated that confidence among small business owners fell in September, with more than half believing the country is approaching a recession.
Obtaining necessary capital has become more expensive and challenging for small businesses, as they usually lack the financial capabilities that larger companies have. Recent surveys showed that 73% of small businesses felt the effects of rising interest rates.
The majority of small business closures occur off the bankruptcy spectrum, with many businesses not having enough debt to warrant filing for bankruptcy. However, government programs, such as Covid emergency loans, prevented numerous small businesses from going bankrupt during the pandemic. Still, repaying these loans poses challenges for entrepreneurs.
Some experts, such as Robert Gonzales, a bankruptcy attorney, believe that we are only at the beginning of the consequences of higher interest rates. He expects a significant number of overburdened small businesses in the future. At the same time, certain companies that expanded during the Covid-induced demand spike are now grappling with reduced demand and increased costs.
While many small businesses remain optimistic about growth, the current economic climate presents significant challenges. Rising interest rates, payroll costs, and loan repayments are weighing on business owners, indicating a need for additional support and adaptive strategies for the future. The question is whether we in the Netherlands will see it in the same measure as in America. And whether the saying: "when America catches cold, Europe sneezes" also applies here.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
Source: The Wall Street Journal
Author: Ruth Simon
