Despite the start of a recovery in the broader economy, signs of lagging health among small businesses are easy to find.

There is debate over how much tight credit is to blame for the sector's plight. For economists at Societe Generale AG, the debate appears to be settled. They argued in a report last month that small enterprises entered the recession with too much leverage, and, in some respects, those debt burdens have gotten worse.

The ratio of debt to assets at noncorporate businesses increased 5.3 percentage points from the fourth quarter of 2007, when the recession began, to 35.1% at the end of last year, according to government data (see charts). For nonfinancial corporations, the ratio increased 3.9 percentage points to 27.2%.

Noncorporate businesses actually shed about 3% of their debt during the period, finishing 2009 with about $3.5 trillion. But the value of their assets fell much faster, driven by a 28.4% drop in their real estate, to $2.3 trillion.

Meanwhile, the reduction in borrowing only helped drive down noncorporate businesses' ratio of debt to output by 0.1 percentage point to 125%. (Nonfinancial corporations increased borrowing, and their ratio of debt to output rose 11.6 percentage points, but it remained lower than for noncorporate businesses at 107.9% in the fourth quarter.)

Noncorporate firms are often regarded as interchangeable with small business, but they include large partnerships and are an imperfect proxy.

Their holdings of property — by wide margins, they are the biggest multifamily and commercial mortgage borrowers — also indicate how intertwined the sector is with real estate and construction, with predictable consequences. (About a fifth of respondents in the National Federation of Independent Business' April survey, published this month, were in the construction trade. The closely watched barometer continued to register entrenched pessimism among proprietors compared with long-term readings, though there was a sharp upturn from March as several components improved dramatically, including a measure of sales expectations.)

Moreover, the access big businesses have to capital markets puts them in a comparatively enviable position, and Federal Reserve research has found that banks, on balance, continued to ratchet up lending rates for firms with sales of less than $50 million in the first quarter, but eased them for larger concerns.

Still, at root, the SocGen economists argued, "small-business balance sheets look more like those of households, less like corporate business," and leverage in the sector is too high.


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