Strategic Insights April 2021

Small Business Credit, Commercial Credit

Small Business Lending Improves to Pandemic-Era High

Index Analysis

In February 2021, the Equifax Small Business Lending Index (SBLI) improved 10.1 points to 147.6 (+7.3%) and is now 2.0% above its year-ago level. Similarly, the SBLI 3-month moving average rose 2.2% to 141.5, though it remains 2.6% below its year-ago level.

Regional Story: Despite the strong February headline reading, lending activity declined in six of the ten largest states, including New York (-2.6% M/M), Michigan (-1.7% M/M), and Pennsylvania (-0.7% M/M). Meanwhile, lending accelerated in North Carolina (+1.3% M/M), Illinois (+1.1% M/M), and Florida (+0.6% M/M). Since the eve of the pandemic a year ago, small businesses lending performance has varied significantly across the country. While states like Georgia (-1.6% Y/Y) and Illinois (-2.1% Y/Y) have nearly returned to pre-pandemic lending levels, New York (-18.8% Y/Y), Pennsylvania (-13.5% Y/Y), and Ohio (-9.0% Y/Y) face longer small business lending recoveries.

Industry Story: At the industry level, just four of 18 industries saw lending conditions improve in February, including Construction (+1.1% M/M) and Public Administration (+0.5% M/M). In contrast, declines persisted in Accommodations (-5.0% M/M), Information (-3.0% M/M), and Professional Services (-2.3% M/M). Compared to a year ago, while Agriculture (+10.8% Y/Y) and Construction (+9.9% Y/Y) continue to shine, many industries remain at or near all-time lows as exemplified by Accommodations (-35.9% Y/Y; all-time low), Finance and Insurance (-17.4% Y/Y; all-time low), Information (-23.6% Y/Y; all-time low), Professional Services (-19.6% Y/Y; all-time low), and Manufacturing (-16.1% Y/Y; 13th percentile).

Economic Context

Small business lending jumped to its highest level in over a year in February as optimism began to rise for consumers and businesses alike. On the consumer side, stimulus payments and vaccinations are driving a surge in confidence: the Conference Board's March Consumer Confidence Index reached its highest level of the pandemic following the largest monthly increase since 2003. Rising confidence is translating into increased spending, as government data show that card transactions are 19.2% above the pre-pandemic baseline as of mid-March. Factory activity is also accelerating: the March Manufacturing ISM jumped to 64.7, its highest reading in 37 years. Small business surveys demonstrate that Main Street is also feeling the emerging tailwind, as evidenced by the WSJ/Vistage Small Business Confidence Index reaching its highest level in 2.5 years. Additionally, a recent NFIB survey found that the number of small businesses that expect to close in the next six months has fallen in half since December (from 25% to 13%), while the share reporting conditions have normalized more than doubled since late January (from 5% to 11%). The optimism is not ubiquitous, as NFIB also reports that 22% of small businesses report that sales volumes are less than half their pre-COVID levels, while Opportunity Insights data suggest that as of late-March, a third of small businesses open in January 2020 are not currently operating. Overall, however, the near-term outlook for small businesses is brighter than it has been since the pandemic began.

Delinquencies and Defaults on the Decline as the Future Brightens

Index Analysis

The Equifax Small Business Delinquency Index (SBDI) 31–90 Days Past Due declined 2bp in February and is now up 6bp from a year ago. The SBDI 91–180 Days Past Due was unchanged in February and up 21bp Y/Y. Defaults declined 5bp to 3.21% — the largest monthly decline in over seven years — but are 91bp above year-ago levels.

Regional Story: In February, delinquencies fell in five of the ten largest states including modest declines in Ohio (-4bp M/M), New York (-4bp M/M), and Michigan (-4bp M/M). In contrast, delinquencies rose in Pennsylvania (+9bp M/M) and Texas (+6bp M/M). On an annual basis, delinquency levels fell in North Carolina (-14bp Y/Y) and Georgia (-10bp Y/Y) but remain elevated in Illinois (+58bp Y/Y), Pennsylvania (+38bp Y/Y), and California (+23bp Y/Y). Though still well above year-ago levels, defaults declined in all ten of the largest states for the first time since Nov. 2014, including sizable decreases in Georgia (-19bp M/M; +39bp Y/Y), Michigan (-10bp M/M; +63bp Y/Y), and Florida (-7bp M/M; +97bp Y/Y).

Industry Story: Delinquencies decreased in all six tracked industries last month, with five of the six now at the lowest level since the pandemic began. Monthly declines were led by Retail (-8bp M/M; +56bp Y/Y) and Health Care (-6bp M/M; +14bp Y/Y), though year-on-year delinquencies remain elevated for both. Defaults improved significantly last month, falling in 15 of 18 industries. The largest decreases occurred in Transportation (-31bp M/M) and Retail (-14bp M/M); notably, some of the hardest-hit industries improved last month including Health Care (-5bp M/M) and Accommodations (-7bp M/M). On a year-on-year basis, Transportation (-111bp Y/Y) remains the only industry in decline, though Construction (+13bp Y/Y) and Real Estate (+51bp Y/Y) are inching closer to pre-pandemic levels.

Economic Context

The financial outlook for small businesses improved in February according to the Equifax SBDI and SBDFI, as delinquencies fell to their lowest level since the pandemic began and defaults saw their largest monthly decline in over seven years. Similar positive developments can be seen in Opportunity Insights data showing small business revenues increasing rapidly in March to their highest point relative to pre-pandemic levels since Labor Day. Separately, a recent NFIB survey found 73% of those who applied for PPP loan forgiveness have now received final confirmation of their forgiveness, which should provide small business owners more certainty regarding their financial situation. Elsewhere, cost pressures may be starting to build in the Main Street labor market. In the March NFIB Jobs Report, 42% of small businesses reported an inability to fill job openings, an all-time high. As a result, small business owners have raised compensation levels at the fastest rate in the past year.
Overall, while Main Street is not out of the woods yet, the worst appears to be over. Small businesses that have managed to stay afloat over the last year should be well-positioned for the months ahead as vaccination rates climbs and operating restrictions are slowly lifted.