Rise in Borrowing Points to Small-Business Recovery in 2012

Michael Essany Headshot by Michael Essany on January 9, 2012
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2012 is beginning on a positive economic note for small businesses.

The Thomson Reuters/PayNet Small Business Lending Index shows that small-business borrowing in the United States recently returned to levels we haven’t seen since the global economic downturn started. The index, which monitors the volume of financing to small businesses, climbed 10.2 points in November to 106.4 — the highest level recorded since February 2008. Year-over-year, the closely watched index spiked a healthy 18 percentage points.

News of the unexpected borrowing boom is being interpreted widely as a strong indicator of accelerating growth in the U.S. economy. The index also illustrates how small businesses have re-engineered themselves over the past four years to become more profitable and confident about expanding, with lower-risk loan profiles, says William Phelan, president of PayNet, a provider of risk-management tools and commercial-credit market analysis.

New Phase of the Business Cycle

“We are entering a new phase of the business cycle,” Phelan tells Reuters. “Businesses are betting on the future with increased investment spending.”

Millions of small businesses have seen their financial capacity improve markedly since 2009, when approximately 7 percent of small businesses in the United States went under, he adds. Only 3 percent of small businesses are expected to meet a similar fate in 2012.

“We’ve seen delinquencies improve consistently to levels that are now below risk from 2005, so that lends confidence in my mind that we’ve got these millions of companies in the United States that now have financial capacity that didn’t exist three years ago,” Phelan asserts.

Other Indicators: The Unemployed, Home Buyers

Other subtle indicators corroborate the idea that the U.S. economy is gaining traction: On Dec. 29, the U.S. Labor Department said the number of people applying for unemployment benefits rose during the previous week by 15,000. But the four-week average dropped to 375,000, which was the lowest level since June 2008. Just three weeks earlier, The National Association of Realtors said the number of new home buyers in November had reached its highest level in 18 months.

So, although some 25 million Americans remain out of work, it appears that the nation’s economic engine is no longer stalled. Fourth-quarter economic growth is now projected to exceed a 3 percent annual pace, an acceleration from 1.8 percent in Q3.

“We are now in this new phase of growth and low risk,” Phelan says. “The key question is: How long is this phase going to last?”

Until the answer becomes apparent, small businesses are likely to continue operating with cautious optimism.

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