The Experian/Moody’s Analytics Small Business Credit Index (SBCI) for Q3 2014 reaches an all-time high for the quarter. “The most severe delinquencies are going down,” said Joel Prius, Experian’s senior business consultant. “Basically, small businesses are clawing their way back.”
This is big news for small business owners who depend on borrowed cash to fuel growth and fund working capital. The index measures credit conditions for firms with fewer than 100 employees, making it very relevant to Main Street. According to the report, “Moody’s Analytics expects Gross Domestic Product (GDP) growth to remain north of 3 percent through 2015, and the United States should be back to full employment by the end of 2016. Average earnings will rise as the labor market tightens. This will go a long way to boosting consumer sentiment and spending, which will ultimately support small-business balance sheets.”
The biggest news of the report is the drop in delinquency rates to a low of 8.8 percent. Small business owners significantly improved their payment behavior in Q3, reducing the number of days they paid their bill beyond the contracted terms by 19 percent from a year ago. This had a positive impact on commercial risk scores—with an average 4.5 percent increase.
“The data showing improved business credit performance doesn’t just benefit small businesses, but it also helps lenders and suppliers,” said Prius. “Not only do they have the reassurance that they’ll see repayment on loans that they’ve extended, but they will be able to use this insight to take the appropriate action to better mitigate risk and have more confidence when making future lending decisions. If the positive performance continues during this stressful time of the year, both small businesses and lenders will be able to enter 2015 with some momentum.”
Basically, as small business owners get a better handle on delinquencies (in this case, primarily severe delinquencies—those over 99 days) and improve their commercial risk scores, it makes it easier for banks and other lenders to extend credit. This could be particularly beneficial heading into the holidays. “With improved business credit performance, small businesses are able to gain access to wider availability of credit, which is crucial as inventory demands and employee hours increase during the shopping season,” adds Prius.
Some areas of the country deserve special mention. The northeast is gaining ground as manufacturing (the big one) and construction improve—although construction is still the most delinquent, it is doing better. The west continues to be a hot spot in the economy, likely driven by the strength of high-tech businesses. An increase in demand for lines of credit in the west and northeast is consistent with the strength of these regions and, according to Prius, are largely for working capital-type purposes.
If you remember Q1 of this year, the particularly harsh winter for many parts of the country took a toll on a lot of small businesses, but Q3 results seem to point to a significant rebound since then. “Bankruptcy rates also showed a significant improvement with 11.9 percent fewer businesses filing,” cite the report authors.
Main Street confidence in the sustainability of recent economic growth is up, but I’d call it a cautious optimism. Gridlock in Washington isn’t doing small business any favors, but the overall economy seems to be improving despite that—albeit at a slower pace than might otherwise be possible.
This report seems to indicate that Main Street is getting healthier than they have been in years, and that is a very good sign. Because small business accounts for the lion’s share of job creation in the U.S. and roughly half of current private employment, the growing financial strength of small business bodes well for the job creation Moody’s predicts.
If small business can maintain the same trajectory through the end of the year, it looks like a strong Q4 and 2015 could be in our future.
November 24, 2014
By Ty Kiisel | Contributor