Small business lending freeze starting to thaw


A number of new surveys suggest small business owners are starting to find the capital they so desperately need. (Marvin Joseph/WASHINGTON POST)

The small business lending market has yet to thaw in the wake of the recession. However, several recent studies suggest the ice may finally be starting to melt.

The credit health of small companies across the country improved during the first quarter of 2013, according to a new report by Experian and Moody’s Analytics, surprising analysts, most of whom were expecting either no change or a slight decline over the first few months of the year.

Instead, credit quality jumped 4.5 percent from the final quarter of 2012, which was also revised upward 7.1 percent from the initial findings back in February.

“Small businesses have reduced their levels of payment delinquency, and that is a good sign,” Dan Meder, vice president of Experian’s Business Information Services, said in a statement. His company’s report takes into account the credit health of firms with between five and 99 employees.

However, noting that the country still faces an unsteady economic outlook, Meder added, “near-term pressure on consumer spending may adversely affect cash flow, so small businesses must continue to remain diligent in their payment behavior.”

The Experian/Moody’s report is one of several periodic measures of small business borrowing, and the indices often conflict — but for right now, most are pointing in the same, encouraging direction.

Sageworks, a financial information firm, released its latest private company report earlier this week, which shows that the average risk of business loan default has dropped to 4.1 percent from 5.1 percent last April.

Meanwhile, the report showed the average length of time firms would need to pay off their current debt is falling, while average net profit margins are increasing (up from 4.5 percent in April 2012 to 6.8 percent in April 2013).

“The improvement in default rates coupled with healthy sales and profitability show that private companies may be well positioned to borrow,” said Sageworks Chairman Brian Hamilton.

The small business lending Index from Direct Capital, which provides equipment leasing and business loans, backs up that claim, showing that small business borrowing demand ticked higher nationwide for the fourth straight month in April. Over that period, the number of small business owners seeking loans has surged 44 percent compared to the first four months of 2012.

But are they actually finding the capital they need? More and more of them, yes, according to online lending platform Biz2Credit’s monthly survey.

The report showed the nation’s largest banks approved 16.8 percent of small business loans in April, up from 15.7 percent in March and 10.6 percent in April 2012. The 16.8 percent reading for large banks (those with more than $10 billion in assets) was the highest since Biz2Credit started crunching the numbers in 2011.

The reports signify further good news for the economy, which has shown a number of signs of improvement in the past few weeks. Consumer confidence reached a five-year high in May, while housing prices rose at a faster pace this past year than they have since 2006.

Still, any optimism about the small business lending market must be tempered by the expected fallout from sequestration and recent tax hikes, according to Mark Zandi, chief economist at Moody’s Analytics.

“Small-business credit conditions are improving, but only slowly and unevenly across the country,” said Zandi, who pointed out that credit quality has not recovered on the East Coast nearly as fast as it has out West.

“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,” he added.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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