Small business bankruptcies up in 2011

Small business bankruptcies spiked last year, following an alarming growth in personal bankruptcies with effects that spilled over into many claimants' small business ventures. The good news is credit analysts say growth in the insolvency tally will likely slow in 2012.

A total of 2,413 business bankruptcies were declared in the Czech Republic last year, 49 percent of which were small businesses or those run by entrepreneurs with a trade certificate, which accounted for just 22 percent of business bankruptcies in 2010, according to data from the Czech Credit Bureau (CCB).

"The dramatic growth in the number of bankrupt small businesses in 2011 was mainly due to the global economic crisis and the fall in the domestic economy," said Alexandr Harant of the Czech SME Union.

In December alone, 663 business bankruptcies were declared, by far the highest monthly amount since the new corporate bankruptcy law went into force in 2008.

Despite the overall growth, larger businesses experienced a 20 percent drop in bankruptcies year on year, while the number of small business bankruptcies grew 815 cases to 1,181. Credit analysts say small businesses have a tougher time accessing capital and are more sensitive to fluctuations in price on the supply side, as well as energy costs, which went up for many businesses last year.

 "In comparison with large businesses, small businesses have worse access to bank credit, lower sales opportunities, the share of their fixed payments is higher and their liquidity lower," said Věra Kameníčková, an analyst with CCB.

Agriculture and mining saw the biggest annual increase in bankruptcies, up 40 percent. The construction sector, which was hit especially hard by low demand for real estate development and a steep reduction in public expenditures for infrastructure, reported a 6 percent increase in bankruptcies in annual terms, and registered 73 bankruptcies per 10,000 companies, which was the largest amount of any individual sector.

Trade and restaurant services saw 416 bankruptcies last year, a high amount but one that has not changed in annual terms. A total of 367 bankruptcies were declared on companies operating in services, an annual decrease of 3 percent.

Services as an aggregate, on the other hand, were the least risky business to be in, with just 27 bankruptcies per 10,000 registered companies.

Small business advocates complain about the lack of support available to small businesses at risk of bankruptcy. They say there are very few, if any, options for many entrepreneurs to get affordable financial and credit counseling.

As the largest employers and accounting for 90 percent of all businesses in the country, according to the Czech Small and Medium Enterprise (SME) Union, SMEs could benefit from a bit more support from the state, especially in the context of education.

"Support from the state could make life easier for small businesses," Harant said. "Especially in the area of informing the business community about tax policy and changes, facilitating the establishment of new businesses and better cooperation between the tax, health insurance and social security offices and general simplification of tax obligations."

One of the central components of the tax legislation approved at the end of last year is a "central point of contact," where entrepreneurs with a small business license can go to pay taxes, health insurance and social security. The system is set to take effect in 2015.

But despite a more simplified tax and insurance benefit payment system, the overall economic forecast for the Czech Republic in 2012 means many small business owners will continue to struggle to stay in the black.

"Company bankruptcies are nothing new, but unfortunately in 2012, we have to prepare for further growth," Harant said. "By our forecasts, this will be the most dramatic in the hospitality industry, retail trade and services."

The CCB also anticipates additional bankruptcies this year, but says the number of filings will slow down.

"Business bankruptcies will continue to rise, and the pace will probably be lower, though small businesses will dominate as they have in the past few months," Kameníčková said. "The main reason is the rather rapid growth of bankruptcy filings on the one hand, and the economic outlook for the Czech Republic as well as for Germany, the main trade partner, which is not very favorable."

Emily Thompson can be reached at
ethompson@praguepost.com