Q3 2013

Experian/Moodys Analytics Small Business Credit Index

Table of Contents
Executive summary

Experian/Moodys Analytics Small Business Credit Index

Behind the numbers

Recent performance

Still a long way back

Regional pattern persists

Prolonged uncertainty from the shutdown

Experian/Moodys Analytics Small Business Credit Index

Small-business credit quality continues to improve

as credit balances rise and delinquency rates fall
Executive summary
Small-business credit quality improved markedly in the third quarter, lifting the Experian/Moodys Analytics
Small Business Credit Index 2.3 points higher to 118.5 from an upwardly revised 116.2 (previously 111.7*)
in the second quarter (see chart 1). The most recent index value is the highest since its inception and is an
encouraging sign that small firms financial houses are finally starting to fall into order.
The index measures credit quality for firms with fewer than 100 workers and has trended upward for the past
year. Credit balances expanded at their fastest pace in at least two years, and the delinquency rate has fallen
consistently. Ten percent of outstanding small-business credit balances were past due in the third quarter,
down 0.7 percentage point from a year ago and the smallest share since the recovery began.
The federal government shutdown in October took a bite out of small-business lending, according to the
U.S. Small Business Administration (SBA), but loan volumes have already improved since the government
reopened. Hence, it doesnt look like the shutdown will greatly alter the small-business credit environment
over the course of the fourth quarter.
Uncertainty poses a greater threat to small firms. The deal struck on Oct. 17 to fund the government and
avert breaching the debt ceiling only funds the government until January and extends the debt ceiling
through February. Consumer and business confidence will be tested as policymakers once again negotiate
a budget and raise the debt ceiling in just a few months. Therefore, it wouldnt be surprising if credit
conditions for small businesses fail to improve further over the next couple of quarters.

*Recalibration of the index led to the larger-than-average revision.

Experian/Moodys Analytics Small Business Credit Index

Chart 1: Credit Quality Steadily Improves
Small Business Credit Index, 2011Q1 = 100

120
118
116
114
112
110
108
106
104
102
100
98
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Current quarter (2013 Q3): 118.5

Previous quarter (2013 Q2): 116.2

Experian/Moodys Analytics Small Business Credit Index

Behind the numbers
The rise in the Small Business Credit
Index last quarter was supported
by a strong increase in total credit
outstanding, which rose at a doubledigit pace in the third quarter (see
chart 2). This is an indication that the
small-business lending market is finally
starting to thaw after credit markets
froze during the recession. This is
especially good news, since it could
suggest more small firms have the
confidence to borrow and expand. The
30- and 90-day delinquency rate buckets
also ticked down 0.1 percentage point,
offering a modest lift to the index.
The rise in credit balances is
corroborated by responses from the
Federal Reserves Senior Loan Officer
Opinion Survey. The net share of banks
loosening credit standards for small
businesses has risen noticeably over the
past year. Moreover, this has been met
by a larger appetite for credit among
small companies (see chart 3). The net
percentage of banks reporting increased
loan demand from small firms hit an
eight-year high in the third quarter. The
SBA also reports a healthy 17.9 percent
rise in approved 7(a) loan balances in
the fiscal year ended September 30
compared to 2012.
This is only part of the story, however.
Financial lines of credit comprise only
about 25 percent of the data used in the
index. The other three-quarters is made
up of nonfinancial trades. For example,
a small law office may open an account
at Staples for office supplies rather
than take out a loan or obtain a credit
card to fund those purchases. It may be

that nonfinancial lenders are following

banks lead and opening more accounts
in search of revenues; the data certainly
suggest that is the case.

Recent performance
The delinquency rate for small-business
credit declined during the quarter
and has been steadily declining since
peaking in summer 2011. This has been
accomplished in part by keeping labor
costs in check.
Small-business employment dipped by
0.06 percent in October after essentially
holding flat for the three months prior,
according to the Intuit Small Business
Employment Index that measures
employment for companies with fewer
than 20 workers (see chart 4). Though
this represents only a subsample of
businesses considered small by our
definition, it serves as a decent rough
proxy nonetheless. Small companies
held their staffs steady amid rising policy
uncertainty ahead of the shutdown and
tepid consumer spending growth, but
more job losses could be on the way if
political uncertainty rises much more.
This is in line with the National
Federation of Independent Businesses
(NFIB) Small Business Survey, which
also indicates small firms are in a
holding pattern. Sentiment has barely
budged since the summer, and a
solid majority of respondents feel
the economy will deteriorate over the
next six months (see chart 5). Another
parallel drawn between the Intuit and
NFIB surveys is that earnings trends
have been persistently negative for
nearly all of 2013.

Still a long way back

The performance of small firms, which
is more tightly tethered to demand for
specialty goods and services, has been
weaker than that of larger businesses
since the recovery officially began
in June 2009. The U.S. recovery has
proceeded in fits and starts, sidelining
consumer spending on these types of
items to a great extent.
The housing collapse decimated the
construction industry, taking builder
firms, which typically employ fewer than
100 workers, down with it. Only now, more
than six years after the bottom gave out
on the housing market, are construction
firms fortunes changing for the better.
With the housing recovery firmly in place,
orders for new homes and renovations to
existing ones are rebounding.
Notwithstanding recent momentum,
both residential and nonresidential
building companies have a long
way back. The Intuit Small Business
Revenue Index reveals that revenues fell
by a disproportionately large amount for
small construction firms in the wake of
the housing bust and have trailed other
industries throughout the recovery (see
chart 6). Moreover, balance sheets at
small construction companies remain
weak: The share of past-due balances
owed to creditors by construction firms
with fewer than 100 workers rests at
17.4 percent, well above the 10 percent
average for all industries.
The good news is that constructioncompany revenues are climbing back
steadily, which should begin to show up
as stronger credit quality over the next
few quarters.

Experian/Moodys Analytics Small Business Credit Index

Chart 2: Delinquency Rate Hits New Low

Net % of banks reporting

13.0

15

40

12.5

10

12.0

11.5

11.0
10.5

-5

-10

11

12

13

Outstanding credit, % change year ago

20

Delinquency rate %

Outstanding credit, %
change year ago

Chart 3: Small-Business Credit Market Thaws Out

0
-20
-40

10.0

-60

9.5

-80

Delinquency rate %

09

10

11

Looser credit for small firms

12

13

Higher demand for loans from small firms

Sources: FRB: Senior Loan Officer Opinion Survey, Moodys Analytics

Sources: Experian, Moodys Analytics

Chart 4: Small Firms Start to Shed Workers

Intuit Small Business Employment Index, % change, <20 workers

0.20
0.15
Employment

0.5

Employment
Worker hours

0.4

Compensation

0.3
0.2

0.10

0.1

0.05

0.00

-0.1

-0.05

Worker hours / Compensation

0.25

-0.2
-0.3

-0.10
11

12

13

Sources: Intuit, Moodys Analytics

Chart 5: Companies Still Leery of the Future

Chart 6: Builders Cash Flows Choked Off

NFIB small business optimism index

Intuit Small Business Revenue Index, Jan 2005 = 100

10
0

140

94

135

93

130

92

125

91

-10

90
89

-20

88

-30
-40

95

10

11

12

13

Net % of firms expecting economy to improve

Composite index
Sources: NFIB, Moodys Analytics

Composite index

Net % of firms expecting

economy to improve

20

120
115
110
105

87

100

86

95

85

90

05

06

Total

07

08

09

10

11

12

13

Construction

Sources: Intuit, Moodys Analytics

Experian/Moodys Analytics Small Business Credit Index

Regional pattern persists
The regional credit divide inherent thus
far in the recovery remains intact. The
credit profiles of small companies in
the West remain substantially stronger
than those in the eastern portion of the
country (see chart 7). This is and has
been particularly true in the Mountain
West. For instance, past-due balances in
Utah comprise a mere 1.1 percent of
all balances, and Idahoan small firms
boast a similarly low 2.2 percent
delinquency rate.
Small companies in Florida have
continually shown the weakest credit
performance in the nation, with a
quarter of all balances being paid
beyond contracted terms. The real-estate
bust was especially harsh in Florida,
and overdevelopment led to a severe
residential-property supply overhang
that quickly lowered house prices. The
drop in home values was exacerbated by
a foreclosure rate that ballooned and still
remains nearly four times the national
average. In the end, house prices were
nearly halved and are still struggling to
gain ground.
This has meant a long and painful
six years for Florida construction
companies. Small businesses let go of
more workers proportionally, many of
whom were builders, than elsewhere in
the country. Construction employment
in Florida dropped 50 percent between
2007 and 2011 and has hardly made
any headway since. For context, U.S.
construction employment fell by about
30 period over that time period.
An overwhelming amount of
construction companies are small
businesses and a peek into the credit

quality of small Florida builders

sheds some light on the extent to
which they are hurting. Almost 30
percent of balances owed by small
construction firms are being paid late
in the Sunshine State, much higher
than the U.S. average of 17.4 percent
and about seven times higher than the
share of delinquent balances owed by
construction companies in Utah. Worse,
nearly all of the overdue balances are
more than 99 days late.
In fact, a number of industries in Florida
are paying late, and this is especially
apparent when comparing small Florida
companies to their counterparts in Utah
and Idaho (see chart 8).
On the bright side, variations in credit
quality across the nation have narrowed
over the past year, a sign that small
companies in the East are making
headway at a sufficient pace to catch
up to their better-performing peers in
the West.
Still, it could get worse before it gets
better for companies in the East. Many
small businesses in the eastern half of
the country are struggling amid high
delinquency on their loans, yet the
bankruptcy rates in many large eastern
cities is quite low. Given relatively weaker
growth projections for that portion of
the country, these companies could end
up filing for bankruptcy to get out from
under their debt. If so, its possible that
business filings could rise modestly
in 2014, especially along the Eastern
Seaboard where delinquency is highest.

Prolonged uncertainty from the

shutdown
Moodys Analytics estimates the 16-day
partial federal government shutdown

will lower real gross domestic product

growth by a half of a percentage point
in the fourth quarter on an annualized
basis. Factoring this in, the forecast
calls for growth to clock in at 2 percent
annualized in the final quarter of 2013.
The drag on growth will undoubtedly
hurt small businesses, but quantifying
the total impact is difficult.
One hard number that stands out is
the volume of approved small-business
loans through the SBA since Oct. 1,
when the shutdown began. The SBA is
a federal agency, meaning thousands
of loans couldnt be serviced during
the federal blackout. Loan volumes
to small companies in the first four
weeks of October were down 35 percent
compared to last year. However, the
news may not be all that bad. The
volume of approved loans was 55
percent below year-ago levels as of
the week ending Oct. 18, just after the
government reopened. This suggests the
gap in loan disbursements could close
by the end of the quarter and that the
overall net impact to credit conditions
will be minimized.
That said, other factors could likely
weigh on small-business credit
conditions as 2013 ends and 2014
begins. Washingtons 11th-hour deal to
reopen the government will do little to
jumpstart the recovery over the next few
months, since a long-term fix is lacking.
Both the University of Michigan
and Conference Board measures
of consumer sentiment show the
government shutdown and debtceiling standoff had a more malignant
effect on consumers psyches than
was expected in October. Confidence
reeled as buyers indicated unease over

Experian/Moodys Analytics Small Business Credit Index

Chart 7: Regional Pattern Holds in Q3

Delinquency rate, $ volume

U.S.= 10%
1.1% to 4.4%
4.5% to 15.6%
15.7% to 25.1%

Sources: Experian, Moodys Analytics

Chart 8: High Delinquency Across Industries in Florida

Delinquency rate, $ volume
Agriculture
Business Services
Health Services
Real Estate

Utah
Idaho
Florida

Wholesale Trade

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Sources: Experian, Moodys Analytics

Experian/Moodys Analytics Small Business Credit Index

their current situation and heightened
pessimism over the economic outlook.
The University of Michigan reading is
the lowest since December of last year,
when consumers were anticipating
higher taxes associated with the
fiscal cliff, and the Conference Board
measure sank to its lowest level since
April. Soft consumer sentiment is bad
news for small retailers during their
most important shopping season, and
delinquency could rise modestly if
buyers pull back on spending.
Any gain in the Small Business Credit
Index this quarter will be extremely
hard-won but not impossible. Small
companies seem to be committed to
improving their credit profiles, even at
the risk of expanding more slowly. It
looks as if small-business loan balances

will recover after the kerfuffle in the

midst of the shutdown. Slow consumer
spending growth will make it tough
for businesses to pay down delinquent
debt. However, this has been the case
for almost all of the recovery, and
delinquency is at its lowest since early
2010. If anything, small companies
will adjust their costs in order to keep
making headway on debt.
Many of the same headwinds that could
hold back improvement in the fourth
quarter will persist into early 2014.
Another budget standoff in January will
be quickly followed by negotiations to
raise the debt ceiling in February. Much
like the recent episode, uncertainty
will likely be an albatross on business
activity. All told, the Small Business
Credit Index is likely to see only modest

improvements over the next couple

of quarters until the thick cloud of
uncertainty dissipates in Washington.

About the index

Experian joined forces with Moodys Analytics, a leading independent provider of economic forecasting, to create a business
index and detailed report that provides insight into the health of U.S. businesses. The Experian/Moodys Analytics Small
Business Credit Index is reported quarterly to show fluctuations in the market and discuss factors that are impacting the
business economy.

About Experians Business Information Services

Experians Business Information Services is a leader in providing data and predictive insights to organizations, helping them
mitigate risk and improve profitability. The companys business database provides comprehensive, third-party-verified information
on 99.9 percent of all U.S. companies. Experian provides market-leading tools that assist clients of all sizes in making real-time
decisions, processing new applications, managing customer relationships and collecting on delinquent accounts. For more
information about Experians advanced business-to-business products and services, visit www.experian.com/b2b.

About Moodys Analytics

Moodys Analytics, a unit of Moodys Corporation, helps capital markets and credit risk management professionals worldwide
respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and
managing risk through expertise and experience in credit analysis, economic research and financial risk management. By
offering leading-edge software and advisory services, as well as the proprietary credit research produced by Moodys Investors
Service, Moodys Analytics integrates and customizes its offerings to address specific business challenges. Further information is
available at www.moodysanalytics.com.

CONTACT EXPERIAN BUSINESS

INFORMATION SERVICES

CONTACT MOODYS ANALYTICS

T: 1 877 565 8153

W: experian.com/b2b

T: 1 866 275 3266

E: help@economy.com
W: moodysanalytics.com

2013 Experian Information Solutions, Inc.

All rights reserved

Copyright 2013 Moodys Analytics, Inc.

All Rights Reserved.

Copyright Notices and Legal Disclaimers

2013 Moodys Analytics, Inc. and Experian Information Solutions, Inc. and/or their respective licensors and affiliates (collectively, the Providers). All rights reserved. ALL INFORMATION
CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE
REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH
PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT THE PROVIDERS PRIOR WRITTEN CONSENT.
All information contained herein is obtained by the Providers from sources believed to be accurate and reliable. Because of the possibility of human or mechanical error as well as other
factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall the Providers, or their sources, have any liability to any
person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or
outside the control of Providers or any of their directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication,
publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits),
even if the Providers are advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis,
projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or
recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY THE PROVIDERS IN ANY FORM OR MANNER
WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and
each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may
consider purchasing, holding, or selling.