If the American economy was an Indy car, we would be driving in second gear. Our powerful, well-tuned vehicle would be picking up speed rapidly, with much of the power under our hood yet to be fully engaged.

This is the type of image that comes to mind from the most recent report on small business credit trends from Experian and Moody's Analytics. The Small Business Credit Index for Q2 2014 shows many economic sectors in their best positions since 2007.

Job growth is up. Delinquency rates are down. Consumer confidence is at its highest level since the current recovery began in 2009. With that said, it is merely a step in the right direction. The economy still has a long way to go before it can be considered fully recovered.

Highlights from the Experian/Moody's Analytics Small Business Credit Index include:

·     In Q2, small business delinquencies — loan payments made more than 30 days past their due date — dropped to 9.3% from 9.7% the previous quarter

·     The average commercial risk score was 61.4 in Q2, up 5.8% from the same period in 2013

·     Small-business bankruptcy rates have decreased by nearly 12% in the second quarter of 2014 from the previous year

·     In the second quarter of the year, small businesses have reduced the number of days that they paid bills beyond contracted terms by 4.5% from a year earlier

·     Job growth in Q2 averaged 277,000 jobs per month, far surpassing the 190,000-job average monthly growth in Q1

A Review by Industry

In terms of their ability to pay down existing debt, small businesses in the finance sector are in the nation’s healthiest industry, with approximately 7.5% of account balances past due. They are followed closely by small businesses in the agriculture and general services industries.

Conversely, small businesses in the construction, administrative and transportation sectors are still having difficulty paying bills in a timely manner, with the latter having nearly 18% of its account balances past due.

However, despite being in the bottom three, the construction sector showed significant improvement in paying down debt in the second quarter. Much of this improvement can be attributed to the improving housing market, which showed healthy gains in Q2 following a major downturn during the unusually frigid winter of Q1 2014. Although construction spending saw a large 1% drop in June, it ended the second quarter 1% higher.

The Commerce Department reports that construction spending rose in 11 of the past 13 months, and this activity is providing support for the rest of the economy.

A Review by Geography

From a regional perspective, economic activity remains healthiest in the Northeast and the West and poorest in the far South, particularly Florida. Wages in Florida refuse to budge, and this lack of consumer buying power is hampering any kind of meaningful small business growth.

On the other hand, Illinois, which for months has been in the doldrums along with Florida, is finally showing signs of resurgence. This is particularly true in downstate Illinois, which is benefitting from an increased demand for manufactured goods, especially automobiles, both domestically and overseas. The share of balances paid late by small businesses in Illinois decreased to 18.8% in the second quarter of 2014. Additionally, despite ranking 48th among all 50 states in the number of days it takes to pay bills past contracted terms, Illinois saw the third largest improvement from the previous year.

One area not likely to improve soon is the District of Columbia. Sequestration, which is still very much in place, has cut the legs out from beneath government-dependent businesses in and around our nation’s capital. Discretionary spending — what matters most for the local economy — will reach an all-time low in fiscal 2014.

What This Means to You

Improvements in delinquency rates and risk scores grouped with a reduction in the number of days it takes small businesses to pay their bills and a lowering of bankruptcy rates is all good news for lenders and suppliers. These companies can have greater confidence when extending credit to small businesses.

As we move forward through the rest of 2014, it will be important, however, to keep an eye on these trends to see how they fluctuate. If they continue to move in a positive direction, small-business lenders and suppliers can rest easy as they shift their lending practices into the next gear.


Joel Pruis is a senior business consultant at Experian’s Business Information Services.

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