Why Small Business Bankruptcies Are on the Rise in the US

Small businesses are the backbone of the US economy, and they are vital to the country’s economic growth. Unfortunately, small business bankruptcies are on the rise, and this has become a major concern. In this article, we will delve into the reasons behind this trend and what can be done to prevent it.

The COVID-19 Pandemic

The COVID-19 pandemic has undoubtedly been the main factor contributing to the rise in small business bankruptcies in the US. The pandemic has forced many small businesses to close their doors because of lockdowns, and this has led to a decrease in revenue. Even though many businesses have adapted by moving online, the initial loss of revenue was often too much for many small businesses to bear. Some small businesses that closed down are now facing difficulties reopening, for instance, due to a lack of funds.

High Operating Costs

High operating costs, such as rent, utilities, wages, and insurance, are always a significant challenge for small businesses. With the coronavirus pandemic, these costs have increased, leading to lower profit margins, which in turn, makes it harder to stay afloat. Many small businesses operate in cities like New York, Los Angeles, and San Francisco, where rents and other expenses are astronomical.

Less Access to Funding

With small businesses struggling to make ends meet, access to funding has become more challenging since the start of the pandemic. Banks and lenders are less willing to lend money to small businesses as they consider them more risky than established companies. Furthermore, the Federal Reserve interest rate cut at the start of the pandemic was less favorable to small businesses than to more substantial companies, leaving small entrepreneurs to cover higher interest rates.

Lack of Preparedness

Small businesses need a plan for catastrophic events. However, many small businesses did not have a plan or enough preparation for a pandemic like COVID-19. In turn, these businesses were affected the most. Small businesses that had a backup plan, such as those businesses that previously set aside funds for a contingency fund, for instance, were better able to manage their affairs during the pandemic.

Conclusion

Small business bankruptcies are on the rise in the US due to the COVID-19 pandemic, high operating costs, less access to funding, and a lack of preparedness. Although the pandemic is primarily to blame, small businesses need to be better prepared for such unpredictable events in the future. There are specific steps that small businesses can take to reduce their vulnerability to pandemics or similar disastrous events, such as creating and maintaining a contingency plan, putting more distance between businesses, and finding ways of diversifying sources of income. With these measures, small businesses can be better equipped to navigate future challenging times.

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