Drop in small-biz lending signals slow-growth months ahead

By William Phelan

The economy has been slowing since making a comeback after the recession, but the latest PayNet data show it’s bound to slow more over the next quarter as small-business borrowing took a dive last month.

If the economy does continue to slow, small businesses may find it harder to pay their bills and they may find capital harder to acquire. For this reason it seems like now is the time for businesses to take on credit while supply and interest rates are so favorable.

During the recession, the demand for small-business loans fell 50 percent. Sales volume shrank and there was uncertainty in economic growth. The recovery saw loan demand rise 17 percent in 2011 as businesses replaced equipment. Though the demand for small-business loans grew last year, small-business investment and loan demand are slowing down again in 2012.

Nationally, the Thomson Reuters PayNet Small Business Lending Index reveals slower growth for the first half of 2012. The Index rose just 2 percent in June over the prior year and fell 5 percent versus the prior month. It stood at 98.5 in June, down from 103.8 the prior month. May was restated as demand fell faster than expected. The index remains below where it began in 2005, indicating the weakness of this latest recovery.

Locally, small businesses in the Chicago Federal Reserve Region have slowed their pace of investment compared with the national average. Through April, expansion on a national basis for all small businesses was 8 percent year over year, while those in the Chicago region expanded 6 percent. Small-business investment expansion has shifted to some of the regions that previously lagged the national average such as Atlanta, San Francisco and Cleveland. Small businesses in the Dallas Fed region expanded at the fastest rate, at 15 percent over the prior year.

On a national basis, small businesses are doing a good job preparing for a slow-growth economy. They have been able to lower their 30-day loan delinquencies to 1.11 percent on a national basis, which means just over 1 out of every 100 dollars of loans is late. For 29 consecutive months, small businesses have reduced loan delinquencies and strengthened their balance sheets. Severe loan delinquencies are falling as well, with loans more than 90 days past due at 0.28 percent. Severe loan delinquency remains at historically low levels and much less than when severe arrears last bottomed out in May 2006 at 0.44 percent.

Loan delinquencies for Chicago-based businesses remain below the national average, even though a slight uptick emerged. The data reveals that moderate loan delinquencies, 30 days past due, rose to 0.83 percent for Chicago-area small businesses. Although Chicago remains one of the lowest delinquent regions, all other Fed regions reported lower loan delinquencies. For example, loan delinquencies in Dallas fell 53 basis points from 1.70 percent down to 1.17 percent, a 31 percent improvement.

The slowing economy means higher credit losses as businesses find it tougher to make loan payments on time. Just how bad this can get is revealed by PayNet’s Stress Tests. A 4 percent fall in GDP translates into a tripling in the rate of business failures. Industry sectors hurt particularly hard are retail stores, eating and drinking establishments and grocers with failures projected to increase 31 percent.

William Phelan is president and co-founder of PayNet Inc., a Chicago-based data analytics company and lending industry consultancy.

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