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More small businesses filed for bankruptcy in February as some rushed to take advantage of a favorable provision in the law that is set to expire soon. Last month, as many as 213 small businesses elected to file under subchapter V of the Bankruptcy Code, a 78% increase compared with the same month a year ago, according to bankruptcy data provider Epiq, WSJ Pro Bankruptcy reported. Companies with less than $7.5 million in debt can file under a subchapter under the bankruptcy code that went into effect in 2020 as part of the Small Business Reorganization Act, offering small businesses a faster and cheaper way to restructure debt. Since then, more than 7,200 cases have been filed under the subchapter, according to the U.S. Department of Justice. Unless Congress takes action, the $7.5 million eligibility limit on subchapter V is due to sunset on June 21, when the limit could go back to the to its original amount of just over $2.7 million when it went effective in February 2020. adjusted for inflation. Last December, the ABI's Subchapter V Task Force released its preliminary report to legislators saying that the eligibility limit of $7.5 million should be made permanent. Legislation hasn’t yet been formally introduced. Eyal Berger, a bankruptcy partner at law firm Akerman who spoke about subchapter V at an American Bankruptcy Institute event, said the increase is due in part to uncertainty over what will happen to the $7.5 million debt cap in June. If the cap reverts to a lower number, fewer companies would be eligible for subchapter V. The end of government aid distributed during the pandemic and the impact of higher interest rates are also factors, said ABI President Soneet Kapila. Small businesses have begun facing repayment demands for the “economic injury disaster loans” that they received from the Small Business Administration during the pandemic, said David Cox, managing attorney at Cox Law Group. “Many of my clients weren’t ready for those additional expenses.”

Confidence among U.S. small businesses weakened unexpectedly in February, as the future path of inflation returned as a top concern, the Wall Street Journal reported. The National Federation of Independent Business said Tuesday that its small-business optimism index declined to 89.4 from 89.9 in January. The index has lagged the 50-year average of 98 for more than two years. It came as 23% of small businesses reported that inflation was their single most pressing business concern, replacing labor quality as the top problem, according to the NFIB. “While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,” NFIB Chief Economist Bill Dunkelberg said. Small business owners’ plans to fill open positions continue to pull back, with a seasonally adjusted 12% planning to create new jobs in the next three months, the lowest level since May 2020, the data said. However, more business owners also expected higher real sales volumes, though overall their numbers remained a net negative, the data said. Meanwhile, the number of businesses raising selling prices also declined, reaching the lowest level since January 2021, NFIB said.

Small businesses in the U.S. remained upbeat in their outlook for 2024 despite elevated debt burdens and high borrowing rates that limited their access to new credit, a new Federal Reserve survey showed, Bloomberg News reported. The Fed’s 12 regional banks on Thursday released their credit conditions survey of more than 6,000 firms with fewer than 500 employees. Overall, expectations were fairly positive for the remainder of the year, with 57% foreseeing a bump up in revenue and only 19% expecting a drop, according to the annual Small Business Credit Survey conducted last fall. A large minority, 39%, expected to increase employment this year, against 11% who anticipated a reduction. Half of employers said their job count would stay flat. Small business expectations for growth generally tracked increasingly optimistic forecasts. Economists now see just a 40% chance of recession in the next year, down from a peak of 65% in the first half of 2023, according to the latest Bloomberg monthly survey of economists. Still, the report found troubling signs in debt levels and in access to credit. While the proportion of small firms carrying $100,000 or more in debt declined slightly to 39%, that remained well above the 31% recorded in 2019. Among the extra debt, 28% of small businesses had an outstanding balance on their pandemic-era COVID-19 Economic Injury Disaster Loan, the survey said. The EIDL program offered long-term, low-interest loans through the Small Business Administration. Additionally, a rising share of applicants for loans, lines of credit and cash advances saw only partial approvals for funding.

Small business owners in the U.S. are struggling to get financing from traditional lenders as the impact of higher rates and bank failures of a year ago linger, holding back business growth for some, Reuters reported. The difficulty in getting more traditional forms of credit shows how sharp interest rate hikes by the U.S. Federal Reserve, exacerbated by the failures of Silicon Valley Bank and Signature Bank last March are reverberating in the economy, say analysts and other industry insiders. Over half a dozen small business owners contacted by Reuters in the last few weeks said they had found it harder to get traditional forms of credit such as loans from big, mid-size and small regional banks. Some were wary of turning to non-traditional lenders like fintech firms or companies that provide financing based on prospective revenues, even though these were readily available. About 77% of small business owners are concerned about their ability to access capital and 28% of loan applicants said they had taken out a loan or line of credit with payment terms they felt were predatory, according to a survey by Goldman Sachs released in January which included nearly 1,500 small borrowers across the country.

Yellowstone Capital, a pioneer in a form of high-risk lending called merchant cash advance, was sued by New York’s attorney general for $1.4 billion for allegedly making illegal loans to small businesses, Bloomberg News reported. For years, Yellowstone lent money at rates that exceeded usury limits — sometimes more than 800% annualized, according to the lawsuit filed in New York state court in Manhattan Tuesday. Like other cash-advance companies, Yellowstone claimed those rules didn’t apply because the transactions were “advances” on businesses’ future revenue rather than loans. They “pretended to offer a helping hand, but instead provided only illegal, ultra-high-interest loans,” Attorney General Letitia James said in a statement. Yellowstone, founded in 2009 by Yitzhak Stern and David Glass, a former stock trader who pleaded guilty to insider trading charges, was one of the biggest players in the industry, which took off after the financial crisis. Yellowstone advanced more than $500 million in 2017 alone. Originally based in New York’s financial district, then Jersey City, New Jersey, its salesmen worked the phones to pitch cash advances to florists, pizzerias, truckers and other small businesses. New York is suing dozens of companies and people related to Yellowstone, which it called a “fraudulent operation” and a “predatory lending scheme.” The state is seeking the recovery of $1.4 billion in interest and fees and a lifetime ban from the industry for Glass. Five people associated with Yellowstone have already agreed to settlements totaling $3.4 million, the attorney general said.