Small businesses in the US are demonstrating some of the most promising financial behaviors seen in recent years, according to the most recent Experian/Moody’s Analytics Small Business Credit Index.
The report, released quarterly, offers insight into the health of businesses in the nation with fewer than 100 employees and analysis of the ongoing credit cycle. This quarter, Experian and Moody’s Analytics offer an optimistic report of borrowing SMEs, and one that could have positive implications far beyond the small business.
Overall, the SBCI hit 116.7 points, an all-time-high and increase from last quarter’s score of 115.2. While the analysis points out that an array of factors may play into the results of the forecast, Experian and Moody’s Analytics found that greater credit balances and lower payment delinquency rates among small businesses borrows are powerful forces in the strengthening small business market.
The report found that as customer spending and sentiment improve, SMEs have greater control of their cash flow and a more consistent ability to pay their bills. Credit balances, the analysis showed, grew by 2.2 percent from last year, representing the third quarter in a row in which SMEs have found greater access to credit.
Meanwhile, delinquent payment rates declined to 8.5 percent. Instances of late payments 30 days past the due date, as well as severely delinquent balances (more than 90 days past the due date), each dropped by 0.2 percent in the fourth quarter. While Experian and Moody’s Analytics acknowledge that account closures may have played a role in these drops in delinquency balances, the 1.4 percent growth in the number of trade accounts – and the increase in the number of tradelines by 1.3 percent – make it unlikely.
The report also found that 10.9 percent fewer SMEs filed for bankruptcy in Q4.
Optimism For SMEs And Beyond
These findings, Experian and Moody’s Analytics say, represent an extremely optimistic outlook for small businesses across the nation, suggesting that these businesses are experiencing significant growth and taking greater control of their cash flow.
“Small businesses are finally kicking into high gear,” Moody’s Analytics Chief Economist Mark Zandi said of the findings. “They are investing and hiring more and are borrowing more to finance their expansion. They are also repaying what they have already borrowed in a more timely way.”
Perhaps even more encouraging, the report notes, is the fact that many small businesses are actually self-improving when it comes to lowering their risk and improving their payment behavior. In the past year, SMEs reduced by more than 19 percent the number of days it took to pay their bills beyond the due date. That reduction amounts to payment a full day earlier than what was seen last year.
With more timely payments, the average commercial risk score for small businesses rose by more than 3 percent to 61.6 (on a scale of 1-100, with 100 being the least risky). This score, Experian explains, predicts how likely a company is to be severely delinquent on a payment.
The numbers, of course, are great news for the small business community. But according to Experian Business Information Services Vice President Dan Meder, it’s not just SMEs benefitting from more consistent repayment practices and reduced risk. “It’s also a good sign for the lenders and suppliers,” he said, “as increased confidence in small businesses’ ability to pay can lead to increased availability of credit and more sales.”
What’s On The Horizon
The Experian and Moody’s Analytics SBCI certainly suggests a path of growth and financial health among small businesses in the US, and particularly those in the West, which see substantially lower delinquency rates than their counterparts in the East, the report found. “Business conditions are much improved and will likely improve even more in coming quarters,” Zandi said.
Meder agrees, adding that “over the last several quarters, we’ve seen small-business credit conditions continually soar to new heights, making the struggles in the early part of 2014 seem like a distant memory.”
But, he warns, the report does not guarantee continued growth and strengthening of the nation’s SMEs. “Lenders and suppliers will want to keep a close eye on how the data continues to trend,” Meder said, “It will be interesting to see if small businesses can continue to maintain this payment behavior as we move through 2015. If they can, the credit spigot will continue to widen, opening up more opportunity for small businesses to grow.