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U. S. Small Businesses Heading Into Choppy Waters

Posted by John Slater on August 9, 2012

Source: Paynet

Small business lending has grown steadily since the end of the recession.  The Thomson Reuters/PayNet index focuses on loans to borrowers with total indebtedness under $1 million.  In a related story it was reported that preliminary June data not reflected in the chart above shows a sharp 5% drop in small business lending.  The article paints a rather gloomy picture for small businesses and the economy as a whole.

PayNet President William Phelan explained, “Businesses and bankers should prepare for more slowdown. Now might be the time to consider adding capital. Credit supply is high and interest rates are incredibly low.” Phelan added “banks should strengthen credit quality to prepare for further slowdown. Stress Tests show that a full blown recession means small business failures could triple.”

According to Paynet the Thomson Reuters/PayNet Small Business Lending Index (SBLI) measures the volume of new commercial loans and leases to small businesses indexed so that January 2005 equals 100.  Because small businesses generally respond to changes in economic conditions more rapidly than larger businesses do, the SBLI serves as a leading indicator of the economy. The index is a highly correlated leading indicator of the GDP by 2 to 5 months.

There is some good news in the report.  Small businesses have been steadily improving their balance sheets since the beginning of the recession and loan delinquencies are at historically very low levels, with severe delinquencies much lower than 2005 the first year for which data is available.  However, the report goes on to say that small business investment rates are lower than in 2005 as companies pay down debt and build cash.  Banks are under-loaned with loan to deposit ratios of 60-70% and are competing hard for the few high quality loans that are available.  While businesses are being cautious in this difficult economic environment, it also reflects the fact that bank credit standards have tightened dramatically since the recession began.   Many small businesses that formerly had access to bank credit are excluded from the banking market and forced to rely on non-bank credit sources which are often far more expensive.

The PayNet index predicted the 2008 crash early in the spring of 2008 with warning signs starting in early 2007 and it appears to have predicted the end of the recession in 2009 by several months.  Currently the index shows that we have likely entered into a more difficult period for small business borrowers and perhaps for the economy as a whole.  Unlike the large multinationals that dominate the financial news, American small businesses still retain a primarily domestic focus and their health is likely a good indicator of the real health of Main Street America.  Certainly this is an indicator that bears watching closely in coming months.

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