Strategic Insights January 2021

Commercial Credit, Small Business Credit

SMB Lending Slips as Main Street Enters Difficult Stretch

Index Analysis

In November, the Equifax Small Business Lending Index (SBLI) fell 9 points (-6.2%) to 136.7, down 2.4% compared to November of last year. The SBLI 3-month moving average increased 1.1% to 142.7 and is now just 0.1% below its year-ago level, nearly returning to its pre-pandemic level.

Regional Story: Lending activity weakened in eight of the ten largest states in November including Michigan (-2.7% M/M), New York (-1.5% M/M), Florida (-0.9% M/M), and Pennsylvania (-0.9% M/M). Meanwhile, lending ticked up in Georgia (+1.1% M/M) and North Carolina (+0.4% M/M). On a year-on-year basis, lending remains down in all ten of the largest states with the largest declines having occurred in Texas (-7.9% Y/Y), Pennsylvania (-12.3% Y/Y), and New York (-13.6% Y/Y). Despite the decline in the headline index, the 3-month moving average reached its highest point since the beginning of the pandemic.

Industry Story: In November, lending activity declined in 16 of 18 industries, the most broad-based monthly decline since May. The largest decrease occurred in Mining, Quarrying, Oil & Gas (-5.4% M/M), while Information (-4.2% M/M) and Finance and Insurance (-1.0% M/M) are at all-time lows. Public Administration (+0.1% M/M) was the only industry see an increase. On an annual basis, large divergences remain between industries: Construction (+8.9% Y/Y) and Agriculture (+5.9% Y/Y) have seen solid growth while Accommodations (-25.8% Y/Y), Arts and Recreation (-23.1% Y/Y; largest-ever annual decline), and Educational Services (-18.1% Y/Y; largest-ever annual decline) continue to suffer.

Economic Context

Mirroring weakness in other small business indicators, the SBLI fell 6.2% in November as rising COVID-19 cases and corresponding business restrictions took a predictable toll on Main Street economic activity. As a result, small business confidence fell for the first time in seven months per the WSJ/Vistage Small Business CEO Confidence Index, primarily driven by declining optimism about the future of the U.S. economy. Similarly, a Q4 Chamber of Commerce/MetLife survey found that 62% of small business owners believe the worst of the pandemic is ahead of us, and both surveys were conducted before news broke of new, more-infectious COVID-19 variants spreading in the United Kingdom and South Africa. Given the public health outlook, the $284 billion recapitalization of the Paycheck Protection Program is a timely development. While this lifeline should soften the economic blow facing many small firms during the winter months ahead, it remains to be seen whether additional support will be needed. Support for small businesses is a rare source of bipartisanship in Congress, but Democrats’ surprising victories in the Georgia Senate races and subsequent control over both houses of Congress and the White House may make passage of additional relief measures easier, should they become necessary. Another key factor to watch for the Main Street economy is the pace of vaccine production, deployment, and dissemination given that mass inoculation is critical to removing business restrictions and returning to normal economic activity.

Delinquency Rate Edges Up as Financial Stress Builds

Index Analysis

The Equifax Small Business Delinquency Index (SBDI) 31–90 Days Past Due inched up 1 basis point (bp) in November, the first monthly increase since May, and is 7bp above its November 2019 level. The SBDI 91–180 Days Past Due was unchanged and 19bp above its year-ago level. Defaults fell 4 bp to 3.24%, the first decline in more than two years.

Regional Story: In November, delinquencies rose in seven of the ten of the largest states — the first time they have risen in any of the tracked states since June — with sizable increases in Florida (+9bp M/M; -18bp Y/Y), Illinois (+13bp M/M; +55bp Y/Y), and Georgia (+15bp M/M; +20bp Y/Y). Delinquencies ticked down in Michigan (-3bp M/M; +12bp Y/Y) and New York (-3bp M/M; +12bp Y/Y). In contrast, defaults rose in just two states (Georgia, +8bp M/M; and Ohio, +2bp M/M), while notable declines were seen in Texas (-14bp M/M) and Michigan (-8bp M/M). On a year-on-year basis however, defaults remain elevated in all ten of the largest states.

Industry Story: Two of the six tracked industries saw delinquencies rise in November as financial stress ticked up in Construction (+8bp M/M) and Retail (+3bp M/M); meanwhile, Health Care (-10bp M/M) experienced another decline. Compared to a year ago, Construction (-40bp Y/Y) and Transportation (-71bp Y/Y) are on better footing, while delinquency levels remain elevated in Retail (+64bp Y/Y) and Health Care (+32 bp Y/Y). Regarding defaults, 11 of 18 industries experienced declining rates last month, including Transportation (-35bp M/M), Finance (-8bp M/M), and Real Estate (-10bp M/M). However, since November of last year, defaults remain high in Accommodations (+345bp Y/Y), Information (+243bp Y/Y), and Health (+163bp Y/Y).

Economic Context

In November, the Equifax small business indices reversed recent trends: the SBDI increased for the first time since May while the SBDFI fell for the first time in more than two years. The decline in defaults is a positive development after plateauing over the last few months. However, the uptick in delinquencies, while modest, is worth monitoring — particularly in states that experienced double-digit increases (e.g., GA and IL) — as it could be an early indication of rising financial stress after payment deferral and forbearance programs have run their course. Fortunately, the extension of PPP should help mitigate some of the worst financial stress at a critical time for small businesses: Opportunity Insights data showed small business revenues (compared to January 2020 levels) declined from -24.5% in mid-October to -32% by mid-December, while the December ADP Employment Report showed small businesses (fewer than 50 employees) laid off 13,000 employees last month, the first net loss since April. PPP 2.0 is designed to help those most in need by limiting company size (300 employees) and maximum loan amount ($2 million) while requiring applicants to document at least a 25% Y/Y loss in sales (a criteria met by roughly half of respondents in a recent NFIB survey). The financial outlook on Main Street remains somewhat shaky; however, a much-needed and better targeted round of PPP funds should help sustain those struggling the most until effective vaccines are widely available.

For more insights on this data, click here to register for our January 2021 Small Business Insights webinar on January 27.