Small Business Lending Suggests Stronger Economy
Dec 14th, 2011 @ 9:20 PM by Amber Nelson
U.S. small businesses are borrowing more these days, after having consolidated and tightened up during the recession. Increased borrowing points to a stronger, more solid economic foundation than before the recession, according to PayNet President William Phelan.
The Thomson Reuters/PayNet Small Business Lending Index, a measure of the total loan activity to small businesses, grew 20 percent in October marking the 15th straight month of double-digit increases in borrowing.
And as lending standards have tighten considerably since the economic crash, it is implied that small businesses have improved their risk profiles. Plus, increased lending shows that businesses are looking more optimistically at the future.
PayNet, a Chicago-based data company, is predicting that the U.S. gross domestic product will show stronger growth in the next two to five months, and Phelan says that small business borrowing is the key indicator.
“There’s underlying strength in the U.S. economy that’s not being reported by stock market indices,” said Phelan at the 2011 Reuters Manufacturing and Transportation Summit as quoted in a Reuters article. “Profits drive confidence, and we’re not seeing that profitability reported anywhere because these are privately owned companies.”
“There are millions of small businesses; their financial capacity has improved vastly since 2009,” he added.
Another sign of healthier small businesses is the falling rate of loan delinquencies. PayNet reports that roughly 7 percent of small businesses defaulted on their loans in 2009, but by the end of 2012, that figure should be down to 3 percent.
“We’ve seen delinquencies improve consistently to levels that are now below risk from 2005, so that lends confidence in my mind that we’ve got these millions of companies in the United States that now have financial capacity that didn’t exist three years ago,” Phelan said.
Phelan believes this strength in small businesses will continue to solidify as long as no new restrictive tax or regulatory laws are enacted.
“Right when they are starting to get their sea legs, you wouldn’t want to have another wave hit the boat,” he said.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.