After years of small business lending sitting dormant at the roots of the recession, there are signs that the money tree is taking leaf again.
The climate for business lending has been improving, according to recent indicators. J.D. Harrison of the Washington Post reported in Post’s May 29 online edition that recent studies showing improved credit quality, lower loan default risk and shorter loan payback periods serve as indicators that the purse strings on small business lending will soon loosen.
Harrison cited a recent and surprising report by Experian and Moody’s Analytics that showed first quarter credit quality in the small business sector improved, shocking analysts, the majority of whom expected it to stagnate, or even worsen during the first three months of the 2013. Credit quality improved by 4.5 percent from the fourth quarter of 2012. The survey measures the credit health of firms with between five and 99 employees.
“Small businesses have reduced their levels of payment delinquency, and that is a good sign,” Experian vice president of Business Information Services, Dan Meder said.
Experian and Moody’s weren’t the only ones trumpeting good news. Two weeks ago, a report on private companies by financial information organization Sageworks measured average risk of business loan default at 4.1 percent, down a point from the April measure of 5.1 percent. Additionally, the Sageworks report noted a decrease in the amount of time private companies would need to pay back loans, and an increase in net profit profit margins from 4.5 percent to 6.8 percent in the one-year period from April 2012-April 2013.
Meanwhile, an index published by equipment leasing and business loan provider Direct Capital revealed similar data from April: demand for borrowing by small business had increased for a fourth straight month by some 44 percent over the first four months of 2012. Small business is even finding loans in amounts that meet its need, according to a monthly survey by online lender Biz2Credit cited by the Post. Large banks approved 16.8 percent of small business loan applications last April, a sizable jump from the 10.2 percent reported in April 2012.
“The improvement in default rates coupled with healthy sales and profitability show that private companies may be well positioned to borrow,” Sageworks Chairman Brian Hamilton told the Post’s Harrison.
Harrison did note that Moody’s Analytics’ chief economist Mark Zandi believes the optimism in the lending market could be tempered by the aftershock of sequestration and a recent round of tax hikes. “Much further progress this year will be difficult given the likely fallout from sizable tax increases and government spending cuts, but conditions are expected to improve next year once these fiscal headwinds begin to fade,” Zandi said.
Harrison, J.D. “Small Business Lending Freeze Starting to Thaw“. Washington Post. 5/29/13.