Small Businesses Are Borrowing Less Again, Per PayNet Index

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Small businesses are borrowing less again.

A March report from the U.S. Small Business Administration showed small business lending had increased for the first time in 10 quarters in the last part of 2012.

But more recently the Thomson Reuters/PayNet Small Business Lending Index (SLBI) says that trend hasn’t carried into the new year. Instead, a recent update in the index shows lending to small businesses has dropped for three consecutive months of the new year ending in March.

The Thomson Reuters/PayNet Small Business Lending Index measures the overall volume of lending to small U.S. companies. The index fell to 98.5 from a total of 105.4 in February.

PayNet President Bill Phelan told Reuters News that this key indicator can be seen as a predictor of the economic climate. He said that decreased borrowing and lending is not a good sign for job growth among small businesses for the next nine months.

“We are seeing that they don’t want to take on new projects, to invest in capital,” Phelan told Reuters. “They’re kinda hunkering down right now. They don’t have the appetite to take on new projects at this time.”

On the other hand, Phelan did acknowledge some bright spots, such as industrial manufacturing. We reported recently on small manufacturers reinventing themselves in the changing economy.

While any negative lending news should sound some alarms for small business owners, especially those teetering to stay afloat, the updated SLBI numbers could just be an expected and normal trend.

“That doesn’t necessarily mean we’re going into a contraction,” Phelan added, talking to Reuters. “The recovery has been going for a while. The cycle has been advancing. You get natural changes in the cycle.”

A key reason why the SLBI shows declines in small business lending over the last three months is because the asset class for these companies has become “riskier” and loan default rates have increased recently. Overall, small business loan default rates will increase to 2.1 percent this year from 1.3 percent.

Phelan said “economically sensitive” small businesses like transportation companies and small retailers continue to recover slowly from the recession and are more likely to default on loans.

The PayNet Index of loan research collects real-time loan information from more than 200 U.S. lenders. Its proprietary database covers 17 million current and historic commercial loans and leases, worth over $740 billion.

Lending Down Photo via Shutterstock


Joshua Sophy Joshua Sophy is the Editor for Small Business Trends and the Head of Content Partnerships. A journalist with 20 years of experience in traditional and online media, he is a member of the Society of Professional Journalists. He founded his own local newspaper, the Pottsville Free Press, covering his hometown.

5 Reactions
  1. Shawn Hessinger

    I think it’s important to focus in on some of Phelan’s comments dispelling the fear that this could be the start of some kind of contraction of the economy. Ebbs and flows of this kind are to be expected. Though certainly growth is always nice to see.

  2. We are getting a lot of inquiries from established small business owners that can’t obtain financing or credit from traditional banks. I think the increase in SBA lending that we are hearing about is relative. There’s been an increase, but still not enough to get the economy back on track. What we are hearing is that the guidelines are still too rigid.

  3. While the current banking situation has stymied the growth of small businesses, sometimes these businesses need to look at other avenues of finance to grow. If banks aren’t lending to smaller businesses, one option they have is to get financed by factoring. Factoring allows businesses to receive advances on outstanding invoices to assist their everyday cash needs.

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  4. allen wallace rockefeller

    Often, the reason that a few small business owners are unable to obtain financing is because they have not properly established the credit history of the business. Many entrepreneurs and small business owners are unaware of the techniques needed to establish a business credit profile. Consequently, when they approach the banks for financing, only their personal credit is taken into consideration – consequently, approval for a small business loan sinks to zero.

  5. Like Danny said, factoring is a very real, and affordable, alternative for small business owners to free up capital. Through 2013, we have been getting many factoring applications and as many applications for other forms of financing. There are still small business owners out there that are looking to grow and they are actively seeking financing help.