Business Failures Down, but Not Done

A recent report shows some improvement in the overall health of businesses, but no sign yet of full recovery.

Bankruptcy has been in the headlines recently, thanks to the high-profile Chapter 11 filings of companies such as gourmet-food retailer Harry & David and bookseller Borders. But business failures overall have been declining, according to the most recent data from Dun & Bradstreet. Formal bankruptcy filings in 2010 were down more than 5% from 2009, while a broader estimate of business failures fell about 13.5%.

That doesn’t mean the economy is out of the woods, though. The failure rate is still high in many industries, as is the percentage of delinquent payments, a leading indicator of bankruptcy risk (see charts below).

“We’re seeing that the economy is improving, but there’s still a high degree of failure risk in the system,” says Andrew Lobsenz, senior vice president of global D&B risk-management solutions. If the recovery happens too slowly, “failure rates could kick back up rather quickly,” he warns.

Transportation was the industry with the highest failure rate in 2010, followed by construction. Coming in third was the financial-services industry, which for the first time in decades displaced manufacturing. That was in large part because of an unusually high number of bank failures, as well as failures of leasing companies.

The percentage of delinquent business payments (those past due more than 90 days) held stable at around 5% for all of 2010. Like the failure rate, the metric implies both good and bad news. “Things overall have stabilized, but they’re still much worse than they were prerecession,” notes Lobsenz. Delinquent payments steadily increased from about 2% of all payments in the middle of 2007 to a high of 6% at the end of 2008, when the financial crisis fully emerged.

Industry failure rates

Manufacturing topped the list of
slow-paying industries, a fact that portends more failures in that sector this year, says Lobsenz. Automotive and telecommunications companies also had high delinquency rates, followed by wholesale and construction.

As for the 50 states, Nevada had both the highest delinquency and failure rates, which D&B attributes to the fall-off in residential housing and tourism. California was second for failure, while Arizona and Utah also had high delinquency rates. The safest state? North Dakota had the lowest failure rate last year, as well as the previous one.

Businesses in Georgia, Louisiana, and South Carolina won “most improved” in the delinquency category, leading D&B to conclude that the South Atlantic region “is leading recovery, when Mountain and Pacific regions are lagging behind.”

“We think it will be a relatively slow recovery,” says Lobsenz. “There’s continued improvement in payment trends and therefore business failures, but a lot of people are going to be very cautious about the credit they extend to customers and the debt they take on themselves.”

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