Zooming In On SMEs’ Financial Weak Spots

The year’s third quarter was a roller coaster for the U.S. and its businesses, especially when considering the presidential election. But the latest data from Moody’s and Experian suggests small businesses were resilient amid uncertainty.

“The U.S. election may have contributed to uncertainty and constrained investment in the small business segment,” said Experian Senior Business Consultant Gavin Harding in a statement announcing the research last week. “However, in the coming months, we will have a clearer picture of the new administration’s policy agenda as it relates to business. Whatever the outcome, with strong fundamentals and capital availability, small businesses are in a good position to respond.”

Moody’s and Experian’s analysis offers much to be optimistic about, but U.S. SMEs are in for a fight to prove their resiliency through Q4.

The Good News

According to researchers, the amount of credit available to small businesses in the U.S. increased by 1 percent in Q3. Utilization of the available credit has also dropped in a continuing trend to 49 percent, researchers found. The report concluded this was a positive sign that SMEs have access to plenty of working capital should they need it.

Delinquencies remained stable, though severe delinquencies in which small businesses are more than 90 days past due on their payments dropped from the previous quarter to 5.4 percent.

Payroll data, too, showed a promising environment, with a spike among small businesses witnessed in October. Though employment levels have slowed in their growth, the report noted that the rate remains larger than needed to keep pace with the rise in population.

According to Moody’s Analytics Chief Economist Mark Zandi, the statistics are promising.

“Credit conditions for small businesses are good and continue to improve, reflecting the solid economy,” he stated.

With the presidential election concluded and the media frenzy beginning to die down, researchers said small businesses may see an uptick in optimism as the fourth quarter progresses.

A Closer Look: The Bad News

Overall, the situation looks good for small businesses in the U.S. But a closer look at the data reveals not everyone is sailing through the end of the year with ease.

Geographically speaking, the middle of the U.S. — the Upper Plains region — saw a spike in small business bankruptcy rates, while Connecticut saw the largest increase in this metric in the third quarter. And while Oregon witnessed the largest decline in small business bankruptcy rates, researchers noted that the state has a higher-than-average rate, with the decline helping to bring the state back to the national average.

Industry averages play a major role in struggling small business figures.

According to Moody’s and Experian, the mining industry is in a particularly weak spot. The sector saw the largest gains in severe delinquencies and bankruptcies in the third quarter compared to any other industry. This sector, which includes gas and oil, is vulnerable to suppressed oil prices, explained researchers.

Transportation and utilities are also struggling, seeing consecutive quarters in which severe delinquency rates rose. As for wholesale, small businesses in this sector saw a plateau of delinquency rates, though some markets saw significant increases in wholesale delinquency rates, researchers stated.

Looking Out For 2017

Political factors are at play when it comes to improving some of the weak spots of small business performance, Moody’s and Experian concluded.

In the oil and gas space, U.S. demand is expected to rise, as are prices, which could help pull these companies up from a struggle. But with OPEC’s next meeting ahead, researchers said top industry players need to set production caps to help boost prices.

Though the presidential election has concluded, the biggest test ahead will be the policies that result. Political uncertainty will endure, the report noted, as policy surrounding taxes and immigration is headed for change. Boosted spending on infrastructure may help small businesses across the country, but other policy moves could prevent small businesses from making use of the credit available and initiating strategic investments.

And, of course, interest rates remain on the tip of everyone’s tongue as the Federal Reserve continues to delay raising the interest rate. With rates expected to increase next year, optimism may rise as those rates are seen as a reflection of a strengthening national economy. But Moody’s and Experian added that small businesses will be hit with an increase in the cost of borrowing, which, again, may impede their investment plans.

Researchers aren’t ready to declare Q3 a win for small businesses in the U.S. yet.

“In the fourth quarter, businesses may delay investment and possibly hiring decisions while they await further information about what the next administration’s policies will be,” the report concluded. Still, with 2017 approaching, small businesses are — on the whole — in a steady position for success.

“Overall, the fourth quarter is set to be positive for credit conditions,” analysts declared. “But further out, there are risks to watch for on the horizon.”