Bankruptcies of big companies, including Party City, Big Lots, TGI Fridays, and Spirit Airlines, have grabbed headlines in recent months, but recent stats show they aren’t alone. Even more alarming, the trend is on the rise, leaving more companies vulnerable.
Bankruptcy filings rose 13.1 percent during the 12-month period ending in March 31st. New cases remain significantly lower than after the 2007-2008 Great Recession, but ongoing economic volatility leaves business owners across Massachusetts asking: What’s next, and how do I protect my business?
Even companies that are financially stable with a strong outlook need to keep a close eye on customers and partners that might hit financial troubles.
According to the Administrative Office of the U.S. Courts, bankruptcy filings by businesses and individuals are on the rise:
For the 12 months ending March 31:
This contrasts sharply with the early pandemic years. Between 2019 and 2022, filings dropped across the board due to government stimulus programs, eviction moratoriums, and other forms of relief. Those protections have since expired, and the numbers are starting to reflect the delayed financial fallout. That means it is more important than ever to take steps to mitigate your risks.
Bankruptcy filings are widely considered a trailing indicator of a recession. That means they typically spike after a recession has started, not before. However, the recent filing increases are an indication that businesses are still feeling the effects of past economic disruptions. Even more alarming, we believe that they’re a sign that more economic strain is on the horizon.
Whether the economy is about to enter a recession or is already in one, one thing is clear: Now is the time to review your financial risk exposure and ensure you’re prepared.
Before extending payment terms, perform credit checks, especially for new or high-volume consumers. Don’t stop there, however. Continue to monitor the financial health of existing customers. Keep an eye out for red flags such as delayed payments, changes in buying patterns, or negative credit events.
Trade credit insurance, also known as accounts receivable insurance, can help protect your business if a customer fails to pay due to bankruptcy or financial hardship. If you are a Massachusetts-based company working with clients across the region or across the country, this can provide a significant safety net. It’s especially important for industries like construction, manufacturing, and wholesale distribution.
Set clear payment policies and consistently enforce them. Don’t wait for a company to declare bankruptcy. At the first sign of financial distress, consider shortening payment terms, requiring deposits, and limiting credit exposure.
Build in protections for your company with any new contract, and consider adding them for existing clients. These may include:
These measures can help your company withstand the financial fallout if a customer runs into unexpected trouble.
If a customer files for bankruptcy, you need to be prepared to protect your financial interests. Steps you can take include:
You don’t need a crystal ball to take action now. Whether or not we’re headed into a recession, the rising number of bankruptcies should be a wake-up call for Massachusetts businesses. Making a few strategic changes today, such as credit checks, tightening terms, insurance coverage, and improved contracts, can put your company in a stronger position.
Need help navigating credit risk or strengthening your contract protections? Contact us to learn how we can help you safeguard your business in uncertain times.