Research on small business credit quality from Experian (EXPN) and Moody’s Analytics (MCO) has highlighted a continental divide. Small businesses in Western states are riding high on an improving housing market, access to Asian markets, and the shale energy boom. East coast businesses have been weighed down by a slower housing recovery and greater exposure to dicey European economies.
A report published today presents a further obstacle for some East coast entrepreneurs: zombies. In a number of states, small businesses have high delinquency rates—they’re late on lots of payments—but a relatively low numbers of bankruptcies. In other words, struggling, debt-ridden companies are still hanging on, and they’re eating up sales that might otherwise flow to businesses with brighter futures. The report says this problem is particularly severe in Florida, where five of the state’s metropolitan areas rank among the country’s 25 worst for small business delinquency rates. You might call it the epicenter of the small business zombie apocalypse.
The report isn’t clear on why this is happening. One possibility: Because small business credit quality is often tied to local housing markets, states whose businesses are ailing may also be awash in foreclosures. In those cases, overwhelmed courts or hurting lenders may be willing to offer debt forbearance to struggling business owners.
In the near term, the low bankruptcy rates are sparing local economies from job cuts and losses for local lenders, says Mark Zandi, chief economist at Moody’s. But zombie businesses are a drain in the long run. “It means that companies that aren’t expanding are making life difficult for more innovative, competitive companies,” Zandi says.
That’s alright because zombie businesses aren’t sustainable. Struggling businesses will eventually go bust in places like Miami, where 31 percent of small business balances are past due, compared to 10 percent nationally. That’s no good for the owners of failing businesses, their workers, or their creditors, but it could be good for the broader economy.
In Western states, higher bankruptcy rates have cleared a path for better performing companies, according to the Experian/Moody’s report, contributing to a better credit landscape for small businesses. Over time, says Zandi, “the economy is never going to flourish if there are too many zombie companies.”