SBA: Bankruptcy Filing Not a Death Knell for Small Businesses
Some small businesses that have previously filed for bankruptcy are no more burdened than other small firms by poor cash flow, high health insurance costs or excessive taxes.
The Small Business Administration’s Office of Advocacy offered that conclusion in a new report, “Beyond Bankruptcy: Does the Bankruptcy Code Provide a Fresh Start to Entrepreneurs?” Firms are surviving years after the filing, according to the report. The data also showed that there is little to distinguish them in terms of firm size, as measured by employment.
Still, there are some ongoing challenges. Small business that filed for bankruptcy have a 24% higher likelihood of being denied a loan and are charged interest rates at least 1% higher than other firms. The report also found that firms owned by African and Latino Americans are even more likely to be denied loans and charged higher interest rates.
Owners of previously bankrupt firms are less likely to own credit cards and are more likely to look for outside financing from venture capitalists. The SBA said credit access remains an area of concern too. Firms with a bankruptcy record are rationed out of the market with loan denial rates nearly three times higher than other firms, according to the report.
By the time failing businesses file for bankruptcy, they have usually been delinquent on their payments for extended periods, or have been in outright default, the data showed. Therefore, their credit score is likely to already reflect these missed payments and creditors would take this into account before making loans.