26 Oct Small Business Chapter 11’s – Swift and Silent
A recent study conducted by risk management solutions provider PayNet, Inc. highlights an interesting trend amongst small businesses: Of 750 small business bankruptcy filers owing an aggrate of $58 million, 50 percent were current with one or more of their lenders when they filed.
The study, released at last week’s Equipment Leasing and Finance Association meeting in Southern California and summarized in a recent Bloomberg piece, indicates that borrowers are refusing to telegraph their distress before they throw in the towel. According to PayNet President Bill Phelan, such borrowers “pay and pay and pay, . . . and then they file for bankruptcy.”
The article highlights the increased risk this type of borrower behavior creates for lenders who typically monitor their borrowers’ accounts for any sign of delinquency. According to Bloomberg, the PayNet study also indicates that most borrowers who sought bankruptcy protection had at least one account in delinquency. The upshot, according to Phelan (as quoted in Bloomberg), is that lenders who can see how borrowers are performing on obligations other than their own enjoy a better chance of identifying at-risk borrowers:
“Just because you’re getting paid doesn’t mean everything’s OK . . . . It’s not the full picture.”
The loans analyzed by PayNet are typical of those held by very small businesses – the study is based on an an average loan size of just over $77,000. Taken at face value, Bloomberg’s assessment of the PayNet study suggests many small business owners have grown far more savvy about “strategic defaults.”
As noted, lenders should beware. And so should vendors and equipment lessors.
Creditors and equipment lessors should pay close attention to trends in accounts payable aging, the recordation of a UCC-1 (if applicable), the presence (or availability) of personal guaranties from principals or other third parties, and the “mix” of goods and services provided (an analysis which may impact the priority of a claim in the debtor’s bankruptcy) . . . among other things.
The small loans addressed by PayNet are indication of a larger trend: PayNet reports that an estimated 100,000 small businesses have sought bankruptcy protection in the last year alone. This data corresponds with earlier predictions about the anticipated “ripple effect” of larger Chapter 11 filings, reported here.
Amidst the “green shoots” of a claimed economic recovery, “swift and silent” small business Chapter 11’s are something to think about.