Finding Early Warning Signs of Business Bankruptcy

What if you could predict when a company was going to go bankrupt, months in advance? Monthly revenue data can help you do exactly that — identify businesses in distress long before they default on payments. We used Enigma’s bankruptcy data and merchant transaction data to highlight how revenue trends can be a leading indicator of business distress. Keep reading to learn what we discovered.

A case study of three bankruptcies

Bankruptcies are a clear sign that a business is distressed. However, by the time a company files for bankruptcy, it’s often unable to pay back many of its debts. This is why most risk professionals supplement bankruptcy data with other data that can provide early alerts of distress.

Below, we highlight three businesses that filed Chapter 7 bankruptcies in December 2020. The businesses were in different cities and different industries, but all were hit hard by the pandemic. For each of these businesses, we found that card revenues were a leading indicator of their distress.

Business 1: A fitness center in Dallas

According to corporate registration data, Hot Bodies Gym* was founded in 2003. Long before the pandemic hit, card revenues were steadily declining. In 2017, their average monthly card revenue was around $380,000. By the end of 2019, it had fallen to around $200,000. Once the lockdowns began in 2020, it was down to a little over $100,000. Although the gym didn’t file for bankruptcy until December 2020, the revenue data show a business clearly in decline for several years prior.

Business 2: A restaurant in Austin

Darlene’s Diner* opened in 2018 in Austin, TX.and saw steady card revenue growth in its first year. However, starting in November 2019, card revenues began to steeply decline. Just before Austin introduced its first stay home order in March 2020, average monthly card revenue was only 40% of what it had been a year earlier.

Though Darlene’s made a small recovery during the warm summer months, it was never able to reach its early revenue numbers. In October the restaurant closed its doors and in December it filed for Chapter 7 bankruptcy. Looking at the card revenues data, we can see that the business was distressed a full year earlier.

Business 3: A dry cleaner in Los Angeles

So Fresh Dry Cleaners* in the Los Angeles metro area first registered as a sole proprietorship in 2015. Throughout 2018 and 2019, monthly card revenues declined slightly but were mostly stable, between $45,000 and $55,000. When the pandemic hit, monthly revenues cratered and never rose above $22,000. In December 2020, the company filed for bankruptcy.

Lagging indicators are not enough

As the above examples show, lagging indicators can leave lenders exposed. Often by the time a business defaults on payments, it has already ceased operations.

Get in touch to discuss how Enigma’s revenues data can help your team mitigate risk.

*All business names have been changed to protect privacy.