Small Business Defaults Rise, Borrowing Drops: "What Scares Us Is The Rise In Delinquencies"

Yesterday, we pointed out something disturbing when we looked at the latest NACM Credit Manager Index report: over the past year it had declined steadily, hitting the lowest print since 2009, or as the National Asscoiation of Credit Managers' economist Chris Kuehl said “Overall, it was fun while it lasted - the trends had been up and now they aren’t" adding that “the best that can be said about the decline is that it was bad and hasn’t gotten much worse.... The sales collapse is consistent with what has been appearing in the Purchasing Managers’ Index and other statistics, so it is unlikely to be an anomaly, not good timing as far as the retail community is concerned.”



Today, we got a validating, and equally concerning, perspective on how small businesses are doing, courtesy of the latest Thomson Reuters/PayNet Small Business Lending Index, which fell to 121.5 in July, the lowest level since January and down from an upwardly revised 139.2 in June. 

But while the headline decline was mildly troubling, the details within the report were worse: according to PayNet, borrowing by U.S. small businesses sank in July, with more firms late on repaying existing loans, trends which according to Reuters "point to softer economic growth ahead."

More troubling is that companies are increasingly struggling to pay back existing debts. Loans more than 30 days past due rose in July to 1.63%, the fourth straight monthly increase and the highest delinquency rate since December 2012, separate data from PayNet showed.

"The thing that scares us is the rise in delinquencies," said Bill Phelan, PayNet's president. "Every one of these months where investment is down and delinquencies are up is one step more toward contraction."

Here is why the PayNet data matters: the index typically corresponds to U.S. gross domestic product growth one or two quarters ahead. With the U.S. economy growing a paltry 1.1% in Q2, many economists have staked their reputation on the belief that growth will rebound in the third quarter. According to this data, not only will there be no rebound, but growth will deteriorate further.

Small business borrowing is a key barometer of growth because small companies tend to do much of the hiring that drives economic gains.

Just as importantly, the figures come as the Federal Reserve mulls the timing of its next rate hike, which may take place in just three weeks. With demand for debt sliding, and delinquencies steadily on the rise, the one thing that will happen if the Fed raises rates again, is accelerate these already adverse trends, leading to even less borrowing, and even more delinquencies and defaults.

PayNet collects real-time loan information such as originations and delinquencies from more than 325 leading U.S. lenders.