Small business credit quality improved slightly in the second quarter amid slower hiring and new worries about the European fiscal crisis, according to a new report from Experian and Moody’s Analytics.
Small business financial strength continues to vary considerably across the country, however. In areas where hiring has picked up and earnings are growing, consumer spending has provided a much welcome boost to small companies. Where spending is still weak, small business credit quality remains poor.
The Experian/Moody's Analytics Small Business Credit Index edged up 0.9 point in the second quarter of 2012, to 104.1 from 103.2. This is the index's third consecutive quarterly improvement, after it declined for much of 2011. The report also indicated that credit quality will be slow to improve in coming months, and threats to consumer confidence and spending have become more prominent. Business confidence is in line with an economy growing below potential, and this could weigh on hiring through the rest of the year, postponing the emergence of a strong, consumer-led recovery.
"Small businesses continue to get their financial houses in order, but the progress is slow and they remain cautious in expanding their operations," said Mark Zandi, chief economist at Moody's Analytics, in a statement. "Until small businesses step up more aggressively, the economy will struggle to grow."
The trend in business payment behavior continues to be a concern, according to the report. On average, U.S. small businesses paid their bills 7.4 days beyond contracted terms during the second quarter, compared with fewer than seven days this time last year. The average grew regardless of firm size, but large firms employing more than 1,000 people showed the greatest increase, along with firms with fewer than 19 workers.
"Paying bills on time is just as critical for a business as it is for a consumer," said Allen Anderson, president of Experian's Business Information Services. "Delinquent payments have a direct negative impact on risk scores, making it difficult to qualify for the best rates and terms. Having this access to additional credit when needed, can be a business' life line in times of economic distress."
For a copy of the report, visit www.experian.com/SmallBusinessCreditIndex.
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