Because of persistently high interest rates, business bankruptcies are increasing at a close to record rate, reports the National Small Business Association (NSB). And in the near future, NSB predicts, "bankruptcies will set new records."
For the year ending June 30, 1981, business bankruptcy filings increased 30.1%, from 36,433 to 47,414. In the first 35 weeks of 1981 alone, business failures increased 41.8% over the same period in 1980. According to Dun & Bradstreet statistics, the number of business failures is the highest since 1961.
The NSB reports a correlation between the Federal Reserve action of October 1979, which resulted in raised interest rates, and the number of companies filing for bankruptcy. In the period between October 1979 and June 1980, bankruptcy proceedings increased 63.57%.
The impact on small business has been serious, says Herb Spira, tax counsel at the NSB. He quotes Dun & Bradstreet statistics that indicate close to half of the companies filing have under $100,000 in liabilities.
In Rhode Island alone, says bankruptcy judge Arthur Votolato, the total number of bankruptcies increased 195% in the period between September 1979 and September 1980. Votolato says that companies with large inventories and high receivables are most vulnerable to high interest rates. "The small business can't carry receivables as long as a large company can," he says.
Among the hardest hit industries, says the NSB, are construction and automobile dealerships. "The plight of industry composed mostly of small firms, such as builders and auto dealerships, tends to confirm the correlation between interest rates and bankruptcies," states the report.
The NSB also found a relationship between individual bankruptcies and business bankruptcies. The 1978 Bankruptcy Reform Act, which liberalized the exemption of debtor properties, made it more attractive for consumers to file, says Votolato. As individuals file, they leave their creditors without payments. Prominent among these creditors, says the NSB, are local small and independent retailers, distributors, builders, and service enterprises.