Why Regional Economic Trends Matter to Your Business

by | Nov 16, 2016 | Business Feature

If you own a business, big or small, you’ve probably extended credit to your customers or clients in one way or another. Maybe you complete work before invoicing, or maybe you ship your product before receiving full payment. Maybe you even loan money directly to another business, either as an investment or a loan. If you loan money or extend credit then making sure you understand local and regional business trends can help you minimize potential losses.

Local and regional business trends can include tax or zoning laws that may affect a business, business bankruptcy rates, and even less obvious issues that may impact business such as local school or political issues. For example, if the local schools appear to be going downhill, this could have an impact on what types of people choose to move to the area. Likewise, an increase in business bankruptcy filings in a geographical area may indicate an environment that is a high risk for creditors. Having several businesses declare bankruptcy can create a domino effect as the businesses stop paying creditors, who then may run in to their own trouble paying their creditors.

Researching the softer, or less obvious, trends such as local politics, involves talking to people and keeping current with local papers and websites. But for trends such as taxes or bankruptcy rates, most business people rely on specialty reports. But what if those reports are not giving a complete or accurate picture?

Regional trends in business bankruptcy rates may be greatly misunderstood, potentially causing business owners and others to under, or over, estimate the risk of doing business or loaning money in certain parts of the country.

In a typical business bankruptcy listing states are ranked by the number of total business bankruptcy filings during a specific period.  The problem with this method is that states with larger populations and larger economies also have more businesses, and thus, a higher number of business bankruptcy listings. Frequently, the six states with the largest population (California, Texas, Florida, New York, Illinois, and Pennsylvania) are also listed as the states with the highest number of business bankruptcies.

Although strictly speaking this may be accurate, it is still misleading. Utilizing the traditional method of ranking states by the number of bankruptcies one might conclude that opening a business in a completely unpopulated area was less risky than opening a business in an area with good business support and a high number of potential customers.

The Kaplan Group, a commercial collection agency, recently published a study analyzing business bankruptcy statistics that takes into account differences in state population and gross domestic product (GDP), thus achieving a more reliable ranking of states according to risk.

Using this new method the largest states are replaced at the top of the list of business bankruptcies with states such as Missouri, New Hampshire, Kansas, and Arkansas. It should be noted that the small state of Delaware ranks high in business bankruptcies under both methods. This is due to the high number of businesses incorporated in Delaware but physically located in other states.

Perhaps of most interest to credit risk professionals are the states with a smaller number of filings that suddenly rise to the riskiest places in the country when adjusted for population and economy size. New Hampshire, which had fewer business bankruptcy filings than 33 other states, turns out to be the second worst state after Missouri (which ranked 7th in number of filings). Kaplan’s report applies these statistics to different quarters so that a clearer picture of the ongoing trends behind business bankruptcy statistics emerges.

Understanding the business climate in any given state or region involves more than business bankruptcy rates. However, making sure that one has a more accurate picture of these rates can improve financial and investment decisions.