Fresh Start Attainable for Bankrupt Small Businesses
Comparing small businesses that have previously filed for bankruptcy to those that have not gone down that road, some firms are no more burdened than others 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 these firms in terms of firm size, as measured by employment.
“Since the bank cannot directly control the actions of the borrower, the objective function facing the bank is to design the loan contract in such a manner that it attracts low-risk borrowers and successful investments,” Mathur said.
The report looked at data from the National Survey of Small Business Finances. The surveys of firms with fewer than 500 employees were conducted by the Federal Reserve Board for data years 1993, 1998 and 2003, looking at 4,000 firms for each year tracked. Mathur said one disadvantage of the data is the exact year of the bankruptcy filing is not known for the firms looked at. It is likely that the consequences of a bankruptcy are worse in the period immediately following the filing and are likely to get mitigated over time, she offered. Profitability, employment and financing are likely to show up as problems in the long term since a filing stays on a firm’s credit record for at least a seven-year period.