Experian Moodys Analytics Small Business Credit Index q4 2012

Q4 2012

Experian/Moody’s Analytics Small Business Credit Index

Executive summarySmall-business credit quality deteriorated considerably in the Q4 2012 period, with the Experian/Moody’s Analytics Small Business Credit Index declining 6.8 points to land at 97.3. This is the lowest reading during our observation period and reflects persistent stress on small firms’ balance sheets.

Delinquent balances rose, pushing the share of delinquent dollars higher to 9.7 percent from the prior quarter’s 9.4 percent. A slowdown in personal income growth led to sluggish retail sales, hurting small-business revenues. Though small firms have worked to trim their labor costs in recent months, sales have fallen more quickly, forcing many small companies to borrow funds to cover their payroll expenses. However, small firms have been reluctant to take on more debt, so this could mean layoffs by small businesses in the coming months if this trend persists.

The weakening in small-business credit quality was expected, and projections remain largely unchanged from the previous quarter. The next six to nine months likely will be lean ones for small businesses as rising taxes strain household budgets and nervous firms of all sizes postpone hiring, thereby stunting the jobs recovery. Consumer sentiment is likely to remain subdued, and spending will be underwhelming, which will keep pressure on small-business balance sheets. However, this slowdown should prove temporary. Once lawmakers come to an agreement on spending cuts and raising the Treasury debt ceiling, business confidence will rebound, spurring stronger job creation. This resurgence will quickly filter through to consumers, who will enjoy stronger income growth, thereby lifting spending. All told, small-business credit quality should begin to improve by year’s end and into 2014.

About the indexExperian and Moody’s Analytics have joined forces to create a business index and detailed report that provides insight into the health of U.S. businesses. The Experian/Moody’s Analytics Small Business Credit Index is reported quarterly to show fluctuations in the market and discuss factors that are impacting the business economy.

Small business credit conditions significantly deteriorate in the 4th quarter

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•TheExperian/Moody’sAnalyticsSmall Business Credit Index dropped 6.8 points in the fourth quarter to land at 97.3, its lowest reading during our observation period.

•Theindexwasdrivenlowerbyaslowdown in personal income growth, which kept retail sales in check and drove small-business revenues lower.

•SuperstormSandyhadlittleimpact on small-business credit quality in hard-hit New York and New Jersey, but the effects of the storm may become more noticeable in 2013.

•Smallcompanieswillfacesetbacks as buyers adjust to smaller paychecks and hiring is quelled by political uncertainty, but credit quality will improve by year’s end and going into 2014.

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Previous quarter (2012 Q3): 104.1Current quarter (2012 Q4): 97.3


Behind the numbers

The Experian/Moody’s Analytics Small Business Credit Index tumbled in the fourth quarter, falling 6.8 points to 97.3 from 104.1 in the previous quarter. This is the second consecutive quarterly decline and is the index’s lowest reading since we began tracking this data .

The drop in the index was driven by a rise in delinquent balances as a slowdown in personal income growth pulled retail sales lower. Intuit data show small-business revenues declined each month since last March, putting pressure on already beleaguered balance sheets. Despite attempts to rein in labor costs by cutting hours and compensation and eliminating jobs during the summer months, revenues have fallen more quickly, forcing many small companies to borrow to cover their payroll expenses.

This is evident in the data, which show that the number of credit accounts increased modestly in the fourth quarter, as did credit balances. Regardless, small firms have diligently deleveraged over the past couple of years, and a survey conducted by the Small Business Administration suggests they are unwilling to take on more debt. Despite the slight uptick in the fourth quarter, credit balances still remain at low levels.

Small companies are justified in their worries. Sales and earnings were weak for much of 2012, and expectations for the next three to six months are generally pessimistic. Most small businesses do not feel that they will be in a position to pay back their balances on time if they take on more debt. With debt-averse companies logging meager earnings, the odds of a pullback in small-business

employment during the early months of 2013 are high as small firms more aggressively trim their labor costs.

Recent performance

Small firms are struggling to pay down their delinquent credit obligations. Balances less than 60 days overdue rose nearly 20 percent on the quarter, overshadowing a slight decline in bills more than 90 days past due. This change was enough to push the share of delinquent dollars higher to 9.7 percent from 9.4 percent in the third quarter. Discouraging is the fact that less than 8 percent of the rise in balances less than 60 days overdue can be attributed to firms with severely past-due accounts paying down their obligations, thereby pulling them into less severe buckets. Nearly all of the climb is the result of firms that previously had been current on their payments falling behind on them.

Another significant feature of the recent trend in small-business credit quality is the ongoing decline in total balances outstanding, which lie 9.5 percent below their peak reached exactly three years ago. According to the NFIB Small Business Optimism Index, companies were shell-shocked by the Great Recession and its aftermath. Since the recovery officially began in June 2009, a majority of the respondents have indicated they felt the economy would deteriorate within six months of being polled in two-thirds of the months they were surveyed. With such dour expectations, it’s no surprise that small businesses weren’t taking out loans with the intention of expanding.

Of course, some of the drop in credit balances also has to do with tighter

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Small firms are struggling to pay down their delinquent credit obligations.


lending standards by banks during and after the credit crunch. According to the Senior Loan Officer Opinion Survey, banks have only slowly eased lending conditions for small companies after a sharp rise in the number of banks tightening them in 2007 and 2008. The survey also measures demand for loans among small firms, and with the exception of a swell in loan requests in early 2012, small businesses have shown little appetite for additional credit, confirming the survey results obtained by the Small Business Administration.

Percentage of dollars delinquent

Over the Q4 2012 time period, the volume of dollars delinquent increased by 4.8 percent, though dollars considered severely delinquent (more than 91 days past due) eased slightly by 0.6 percent. Compared with the previous year, the total volume of delinquent dollars has worsened by 4.7 percent, and dollars considered severely delinquent grew by 2.5 percent.

Large businesses employing 500 to 999 workers made the most headway on delinquent debt over the quarter, with delinquent balances receding a healthy 14.9 percent. Firms with 10 to 19 employees also saw their past-due balances shrink by 6.3 percent.

Similarly, businesses with 500 to 999 employees showed the greatest reduction in severely delinquent debt, which fell by 63 percent during the fourth quarter. The largest increase in severe delinquency during Q4 2012 came from businesses with more than 1,000 employees, worsening by 28.4 percent. Still, severely delinquent debt only comprises about 17 percent

of all past-due balances for those companies, well below the national average of 69.4 percent.

When compared to the previous year, most business sizes showed significant improvements in the volume of dollars delinquent, reducing their past-due debt by as much as 46.8 percent. The smallest businesses (those with one to four employees) showed the greatest increase in percentage of dollars delinquent, worsening 25.2 percent.

Commercial risk score

The average commercial risk score in December 2012 was 58.4, up from 57.1 from September and 57.4 a year ago. The largest businesses (those with more than 1,000 employees) and very small businesses (those with one to four employees) showed the greatest improvement in their commercial risk score when compared to the previous year. The largest businesses improved their commercial credit scores by 18.2 percent, and very small businesses increased their scores 8.9 percent. Large businesses (with 500 to 999 employees) showed the greatest decrease in commercial risk scores, worsening by as much as 9 percent when compared year over year.

All industry groups remained relatively stable in commercial risk score over the Q4 2012 time period. When compared with the previous year, Public Services saw a significant increase in commercial risk scores, improving by 10.2 percent. Conversely, the Utilities sector saw the greatest decrease in commercial risk score, worsening by 10.5 percent.

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When compared to the previous year, most business sizes showed significant improvements in the volume of dollars delinquent, reducing their past-due debt by as much as 46.8 percent.


All U.S. regions remained relatively stable in commercial risk score over the Q4 2012 time period. Year over year, all regions demonstrated minimal fluctuations in credit score, with the exception of the Southeast and Northwest that showed slight improvements (by as much as 3.3 percent) in risk score.

Average days beyond terms (DBT)

U.S. small businesses paid their bills an average of 7.3 days beyond contracted terms in the fourth quarter, roughly the same as in the third quarter and slightly below DBT at this time the year before. Over the Q4 2012 time period, businesses with 50 to 999 employees showed slight increases in past-due payment performance, worsening by as much as 3.6 percent. Still, when compared with the previous year, almost all business sizes showed a decrease in DBT, with the largest businesses (more than 1,000 employees) and businesses with five to nine employees demonstrating the greatest improvement, with an 11.9 percent and 10.8 percent change, respectively.

Across all industry groups, DBT has improved by as much as 3.1 percent over the Q4 2012 time period. Modest but steady improvements in the labor market are lending support to tax revenues, allowing the Public Services sector to get a leg up on debt payments. Year over year, that sector was among those showing the greatest improvements in DBT, decreasing by as much as 39.8 percent. However, lower oil and natural gas prices aren’t helping the Mining and Utilities sectors, in which DBT worsened by as much as 11.3 percent year over year.

All U.S. regions showed slight improvements in DBT during the fourth quarter, with the Midwest region showing the greatest decrease, improving by 1.2 percent. When compared year over year, all regions showed a decrease in DBT, with the greatest positive shifts seen in the Mountain, Northwest and Plains regions, decreasing their DBT by as much as 2.9 percent. This is a marked change from the third quarter, when data indicated nearly every region had an increase in average DBT.

Superstorm Sandy packs a punch, clouding the Mid-Atlantic outlook

Superstorm Sandy left behind an estimated $44.4 billion in property damage, causing hundreds of small businesses to shut down for weeks on end. Yet small-business credit quality emerged relatively unscathed in hard-hit states like New York and New Jersey. Delinquent balances climbed just 0.2 percent in New Jersey during the fourth quarter and actually fell in New York during the same period.

Anecdotal evidence suggests that, while many small companies in New York and New Jersey won’t be back on their feet until the spring, lenders are giving them extensions on their payments, which is the likely reason why delinquent balances haven’t ballooned in those states. Reports indicate that insurance payouts have been swift to companies caught in the path of the storm, and federal funds, along with low-interest loans provided by the Small Business Administration, may also be helping small companies keep up with their debt payments. Credit quality for certain small retailers also may have been

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Superstorm Sandy left behind an estimated $44.4 billion in property damage, causing hundreds of small businesses to shut down for weeks on end. Yet small-business credit quality emerged relatively unscathed in hard-hit states like New York and New Jersey.


protected by a surge in sales as buyers rushed to stockpile necessities ahead of the storm.

Still, it is difficult to pinpoint exactly how credit quality will fare in this region once lenders resume normal debt-payment collection. Odds are high that small construction firms will get a much-needed boost in revenues from rebuilding, which should help them stay on top of their payments. Transportation firms could also see more business as building supplies are brought into the affected areas and damaged goods are taken out. However, restaurants and small retail shops, which may have benefited leading up to the storm, could see sales slip as homeowners and renters are faced with the decision to go out and spend or restore property lost or damaged in the storm. New York and New Jersey account for nearly 10 percent of the entire nation’s small-business credit lines, so any major shift in the credit quality of small companies in those states could influence the U.S. average.

Southeast improves, but a long road awaits

Of the nine Census divisions in the United States, only the East South Central and South Atlantic regions had any decrease in the percentage of dollars delinquent in the Q4 2012 time period. Both regions saw a decline in delinquent dollar volumes, combined with a rise in total balances outstanding. This is welcome news, considering the share of delinquent dollars is 16.1 percent in the East South Central region — well above the U.S. average of 9.7 percent — and 25.9 percent in the South Atlantic, which is the highest of any region in the country.

Florida appears to be finally getting some relief after the housing collapse and a subsequent drop in tourism during the Great Recession decimated that state’s economy. Delinquent balances among Florida’s small businesses dropped 1.4 percent in the fourth quarter and lie just barely above their level a year ago after climbing for most of 2012. Sales tax revenues rose sharply in 2012, indicating that consumers are returning to the Sunshine State and loosening their purse strings once they arrive, lending some sorely needed support to small companies there.

Recent improvements are encouraging, but Florida still has a long way to go before small-business credit quality is healthy again. The delinquency rate is perched at 33.6 percent. This is below its Q3 2012 peak of 34.9 percent but is still the third highest in the United States behind Arkansas and Illinois. Worse, 88 percent of those delinquent dollars are more than 90 days past due.

House prices in Florida still lie more than 40 percent below their prerecession peak, and construction is struggling as a result of owners having little incentive to invest in their properties. The share of dollars delinquent among Florida small construction companies is 54.5 percent, far above the national average of 19 percent.

The state’s housing market has historically relied on retirees moving into the state for support. Yet the recession and its aftermath disrupted that trend as many people postponed retirement or decided not to sell their homes in other regions because of the slump in house prices. There are signs that historical trends are beginning to resume, but

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Florida appears to be finally getting some relief after the housing collapse and a subsequent drop in tourism during the Great Recession decimated that state’s economy.


it will take some time before Florida’s housing market finds its equilibrium, offering little help to local construction firms in the near term.

Alabama also saw its small-business credit quality improve as delinquent balances receded across all delinquency buckets and total balances outstanding grew. The share of dollars delinquent there fell 1.4 percentage points over the quarter and lies some 5.3 percentage points less than a year ago.

Alabama is not in as nearly as bad of shape as Florida, but its economy has largely underperformed during the recovery. The public sector has been an albatross on job growth, but expanding private employment backstopped a deterioration in small-business balance sheets, thanks to several automakers establishing operations in the state. Automobile production has been strong as demand for new vehicles rebounded after the recession ended. Consequently, states with vehicle manufacturing have benefited, and in Alabama’s case, this has helped to offset some of the drag from government layoffs.

Plains states take a step back

Most Census regions saw their small-business credit quality deteriorate, and the North West Central region had the worst decline. Account balances shrank while the volume of delinquent dollars grew. The net result was a 1.3 percentage point rise in the delinquency rate, putting the region’s share of delinquent dollars at 12.2 percent.

Missouri was the state within the region with the most severe weakening in small-business credit quality.

Delinquent dollars have more than doubled there since last year, with construction, transportation and trade each experiencing jumps in delinquent balances. Tepid hiring has led personal income to trail the U.S. average considerably, and this has forced small companies there to cut back their payrolls.

New home construction has turned up noticeably in Missouri, but it has not come to the aid of struggling construction. Homebuilding has been relegated primarily to multifamily units. Apartment buildings tend to be capital-intensive projects, so the benefits of this uptick could be limited to larger construction firms with more heavy equipment at their disposal. Further, since multifamily construction requires fewer workers, it is likely that a smaller number of companies are getting the relief they need. Delinquent dollar volumes among small construction firms in Missouri comprise about a quarter of all balances and have risen 16 percent since the second quarter.

Small firms in North Dakota have flourished during the recovery from strong consumer spending amid the oil boom there. However, they, too, are starting to feel the pressure from lower oil and natural gas prices, along with the weakening domestic and global economies. Delinquent account balances in the state grew 8.5 percent in the fourth quarter and stand some 34.2 percent higher than they did a year ago. This was enough to push the delinquency rate 1 percentage point higher since September to 17.9 percent. This is 5.4 percentage points above its year-ago level and its highest reading during our observation period.

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New home construction has turned up noticeably in Missouri, but it has not come to the aid of struggling construction.


Small mining businesses were among the worst performers nationally, with average days beyond contracted terms growing by 11.3 percent. Yet the deterioration in small-business credit quality is not likely from mining companies themselves in North Dakota. Rather, downstream industries are absorbing much of the impact. Muted global demand for U.S. goods is hitting small trade and transportation firms, and exports from the state have slowed in the second half of the year. Consequently, small trading companies have seen their delinquent balances rise by 61 percent since the second quarter. Additionally, with fewer exports leaving the state, small transportation firms have had less business, resulting in a 77 percent increase in delinquent dollar volumes.

Looking ahead

The weakening in small-business credit quality during the second half of 2012 played out to our expectations, and the outlook for the next several quarters remains largely unchanged from the previous quarter. The first half of 2013 will be wrought with policy uncertainty as Congress works out the details regarding sequestration, which will undermine investor, business and consumer confidence if negotiations reach the zero hour as they did in December. Even though the debt ceiling was extended, which will allow the government to pay its bills on time until May, a confrontation is likely as a more permanent solution to raising the statutory debt limit is reached. If history serves as any guide, another dip in confidence is likely if deliberations resemble those in 2011.

The tumult in Washington will keep hiring plans on the backburner as firms assess the path of future policy, and this will impede the consumer recovery upon which small-business credit quality relies. Indeed, we project a slowdown in hiring, which will cap personal income growth and weigh on consumer spending growth and retail sales. All of these components are used to calculate the Small Business Credit Index, so this trend could foreshadow a further retreat in the index during the first part of 2013. This potential decline will be exacerbated by shrinking take-home pay, since the payroll tax holiday was allowed to expire, notching out 2 percent from paychecks across all income levels.

Declines in the index in early 2013 could be material, mimicking the drop seen in the fourth quarter, and it likely will remain below 100 until at least the second half of 2013. Even if small firms are successful in reining in their costs and use the savings to pay down debt, it most likely will result in job losses, which will feed back into the personal income and spending components of the index.

However, there is a light at the end of the tunnel. Our forecast assumes that lawmakers ultimately will handle sequestration and raising the debt ceiling in a reasonably graceful way, clearing the way for more robust growth as 2013 winds down and 2014 begins. Recovery in the housing market will be instrumental in jumpstarting growth during the second half of 2013. Home values have appreciated steadily, allowing homeowners to rebuild lost equity, which will spur consumer spending as household wealth is restored. This newfound confidence

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The tumult in Washington will keep hiring plans on the backburner as firms assess the path of future policy, and this will impede the consumer recovery upon which small-business credit quality relies.


also will lead to more residential investment, which will spur job creation in construction. During normal times, construction adds between 200,000 and 300,000 jobs to the economy per year — jobs not seen thus far in the recovery.

As the economic stars align themselves later in the year, a virtuous cycle will be put into place, and a noticeable acceleration in the recovery is expected to take hold. This bounce back will ensure that the slump in the Small Business Credit Index is temporary.

If small companies continue to pare back their expenses in the early part of 2013, then the rebound in credit quality from a pickup in consumer spending will be swift and pronounced. All told, the likelihood that the index will climb back above 100 by the end of the year is high, along with the odds that it will remain north of that threshold over the following couple years.

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As the economic stars align themselves later in the year, a virtuous cycle will be put into place, and a noticeable acceleration in the recovery is expected to take hold.

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Experian Moodys Analytics Small Business Credit Index q4 2012

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