The failures of SMEs and mid-cap companies in France go beyond the catch-up phenomenon

A global development which hides numerous disparities and above all some warning signals, notably in SMEs and ETIs and in certain sectors.

An economic context that remains difficult for businesses

The economic environment for businesses is stabilizing, or even improving in some respects, with a new increase in private salaried employment (61.000 over the year in Q2 2024) and a rebound in household purchasing power since Q4 2023 thanks to the decline in inflation with prices at +1,2% over one year in September 2024 compared to +4,9% in September 2023. In addition, the average margin rate for businesses remains at a high level (around 31%) and difficulties in accessing financing remain limited according to the latest BPI-Le Lab barometer.

However, the rate of activity seems to be stabilizing around 1% GDP growth rather than accelerating, and inflation in services, mainly wage-related, is weighing on margins and limiting the prospects for a drop in key rates across the Eurozone. The state of public finances is weighing on long-term rates in France, limiting the potential and speed of the drop in financing costs, and is threatening support mechanisms for certain sectors (e.g. Pinel, MaPrimeRenov). Furthermore, SMEs must deal with margin rates that are well below the average level of French companies, particularly in construction and household services. They continue to favor a logic of financial consolidation with a continued decline in the debt/equity ratio and the repayment of more than 55% of PGE amounts in a context where their business and cash flow prospects are considered mediocre and limit their investment and recourse to credit. Only 2,4% of SMEs and 4,3% of microenterprises fear not repaying their PGE, but the difficulties in certain sectors may weaken the most vulnerable, especially since Urssaf has returned to more traditional practices, after the break of the health crisis.

SMEs and many sectors are particularly affected!

In this context, business failures have continued to rise since the end of 2023. BPCE L'Observatoire counted 13.035 failures in the 3rd quarter of 2024 (+20% compared to Q3 2019), bringing the number of failures* in France to 64.427 over the last 12 months (+24% compared to 2019).

This development highlights a form of "catching up" on the failures avoided from 2020 to 2022 and confirms certain warning signals already perceptible previously, according to Alain Tourdjman, director of economic studies at BPCE, and Julien Laugier, economist at BPCE:

• Overall, failures have exceeded the "record" for the last 15 years. For the past 12 months, the rate of failures has been higher than the period 2010-2015, which is the last particularly bad episode for French companies. However, based on our still provisional data, business failures from July to September 2024 are certainly very high, but do not slip beyond the peaks of 2013-2014.
• This high level is partly explained by a catch-up phenomenon of failures avoided between 2020 and 2022, a phenomenon that cannot be extrapolated, but which currently only concerns 28% of the potential for this period. In fact, there is a strong heterogeneity between the very numerous small entities with fewer than 3 employees where the "catch-up" only reaches 17% and SMEs where, statistically, all SME failures (105%) avoided thanks to the "whatever it takes" have occurred since 2023.
• In fact, SME-ETI failures remain at a high level, 57% above that of 2019, but seem to be stabilizing. Generally speaking, we observe 3 different situations depending on the workforce:
  • Over a rolling year from Q4 2023 to Q3 2024, 5.349 SMEs and mid-cap companies (10 employees or more) went bankrupt, compared to 3.400 in 2019. With the exception of entities with between 50 and 99 employees whose recovery was not complete, we estimate that all of the SME and mid-cap company failures avoided during Covid were ultimately simply postponed.
  • VSEs employing 3 to 9 employees, with a 32% increase in failures compared to 2019, are experiencing a partial recovery in failures avoided between 2020 and 2022.
  • Microenterprises and smaller VSEs (without employees, or employing 1 or 2 employees) are experiencing a clear acceleration in bankruptcies (+19% over the last 12 months compared to 2019) whereas until now they were less affected by the overall increase.
• The impact on jobs, which makes it possible to assess the economic weight of failures, is also stabilizing at a very high level due to the average size of the entities concerned, i.e. more than 250.000 jobs threatened. This is a very high level, 43% beyond 2019, including more than 44.000 in the 3rd quarter of 2024 alone. The economic impact of defaults is therefore not weakening in terms of jobs threatened, and probably also if it were measured in terms of value, receivables, capital, inter-company interactions, etc. according to Alain Tourdjman and Julien Laugier.
• The analysis by size suggests that the high level of failures cannot be explained by the recent increase in creations (mostly without employees). Measuring failures according to the age of the company confirms this hypothesis: the increase in failures has affected companies more than 3 years old, or even more than 5 years old, while the most recent creations contribute less to the failures recorded than in 2015 and 2019.
• By region, some territories are very vulnerable while others are spared. The South-West quarter (Midi-Pyrénées, Aquitaine, Poitou-Charentes) but also Rhône-Alpes and Ile-de-France are very exposed, including in the SME-ETI segment. Conversely, the most spared territories seem to be less economically dynamic (Lorraine, Limousin, La Réunion, etc.). Other factors can also explain territorial disparities, such as the degree of standardization of Urssaf collections and also sectoral specializations.
• By sector, the effects of inflation, rising rates and changes in household consumption behaviour are observed to varying degrees. In particular, some sectors have seen record levels of failures over our period of analysis (until 2009): financial and insurance activities, particularly brokerage and consultancy; road freight transport; real estate (private development and real estate agencies); certain scientific and technical activities (such as head office activities, public relations, design and consultancy offices, engineering and technical studies, construction economists), and vehicle trade and repair. Conversely, the most resilient sectors are: recreational activities (sports, arts, culture), drinking establishments, transport (non-road), agricultural livestock farming and accommodation (hotels, camping, etc.).

Around 65.000 failures expected in 2024: no tsunami, but the highest level in the last 15 years

The latest figures lead us to maintain our forecast for 2024 at around 65.000 failures, according to Alain Tourdjman. This would be the highest level in at least 15 years. Beyond the overall figures, the typology of failing companies should continue to change given…

• … of the acceleration of defaults of small entities, previously less exposed, but a slight improvement in the sectors which have been very affected in recent quarters by household consumption decisions, particularly in food, and even personal services.
• … of the already very advanced catch-up for SMEs, the failures would stabilize on the SME and ETI side with a number of threatened jobs remaining at a high level, close to 250.000 jobs.

*From data extracted and processed by BPCE L'Observatoire economists, it is now able to provide a very detailed statistical and economic analysis of business failures.

Illustrative image of the article via Depositphotos.com.