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Small Business Lending Points to Economic Recovery

By | 03.18.14

The Thomson Reuters/PayNet Small Business Lending Index has long been a measure of how much financing is occurring in the small business world. This January, the Index rose to 117.2, which is an increase of 4 percent from 2013, according to PayNet.

The Index had indicated a drop in December from an almost seven-year high, which is noteworthy, as December is usually a strong month for borrowing. Historically, firms tend to close down their yearly budgets at the end of the year.

Rises in the Index have also long been associated with increased United States economic growth that typically follows in the next one to two quarters.

“It was unexciting growth but it was growth nonetheless,” said Bill Phelan, PayNet founder. Small businesses are known to take out loans for items such as new tools, equipment, and factories. Increased borrowing is often a sign that increased hiring will follow.

The report adds to other signs indicating that the economy is beginning to rebound. For example, although 2013-2014’s harsh winter hurt retail sales, industrial production, home sales, and hiring in early 2014, other recent data, such as consumer sentiment and Midwest factory output, shows that economic strengthening is occurring.

Economic improvement is expected to be good news for the Federal Reserve, as well. New chair Janet Yellen intends to end putting a stop to the Federal Reserve’s huge bond purchasing undertaking before year-end 2014, unless the economy does not improve as anticipated.

The economy did grow at a 2.4 percent yearly rate during the fourth quarter of 2013, which is considerably slower than prior estimates, but still rapid enough to impact and reverse some unemployment. A different index—the Thomson Reuters/PayNet Small Business Delinquency Index—which was very recently released by PayNet, revealed that loan delinquencies are slowly dropping down to near-record lows. In fact, 31-180-day loan delinquencies dropped to 1.45 percent in January for all loans; this down from a 1.46 percent delinquency rate in December.

According to Reuters, “A measure of accounts overdue as a percentage of all loans hit a high of 4.73 percent in August 2009.” In October 2013, a record low was recorded at 1.44 percent. PayNet collects real-time data on loans from more than 250 of the key lenders in the U.S. This includes loan originations and delinquencies.  

Reference:

Reuters; “U.S. small businesses notch year-on-year increase in borrowing;” by Ann Saphir; March 3, 2014.

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