Strategic Insights May 2020

5/7/2020
Commercial Credit, Small Business Credit, PayNet Strategic Insights

Small Business Lending Plummets in March

Index Analysis

The PayNet Small Business Lending Index (SBLI) fell 19.6 points (-13.5%) to 125.2 in March, its lowest level since July 2017, and is now 10.5% below its year-ago level. The SBLI 3-month moving average declined 4.1% last month and is also down 4.1% over the last twelve months.

Regional Story: The impacts of COVID-19 caused lending to contract in March in nine of the ten largest states. Georgia (-1.6% M/M), Pennsylvania (-1.5% M/M), and California (-1.2% M/M) experienced the largest declines, while Ohio (+0.8% M/M) was the lone large state to expand. Measured on an annual basis, lending volumes increased in six of the ten largest states, led by Ohio (+2.8% Y/Y), Georgia (+2.0% Y/Y), and New York (1.3% Y/Y). Year-over-year declines persisted in Illinois (-8.6% Y/Y), Florida (-3.9% Y/Y), and Pennsylvania (-3.4% Y/Y).

Industry Story: Lending activity was mixed across major industries in March. Loan activity increased in Public Administration (+2.7% M/M), Information (+1.4% M/M), and Finance & Insurance (1.0% M/M) while decreasing in Arts, Entertainment, & Recreation (-2.7% M/M) and Mining, Quarrying, & Oil/Gas Extraction (-3.3% M/M) — which is now in the bottom 25% of its historical readings following a collapse in oil prices. Compared to last year, Mining (-10.2% Y/Y) and Transportation & Warehousing (-10.0% Y/Y) are the industries struggling the most, while Public Administration (9.6% Y/Y), Health Care (+8.1% Y/Y) and Construction (+7.4% Y/Y) are bright spots.

Economic Context

The U.S. economy went into hibernation in March, causing GDP to contract 4.8% in the first quarter, the worst quarter since the last recession. Conditions have worsened in April: the latest IHS Markit Flash Composite PMI plummeted to 27.4 — the worst decline in private sector business activity on record — with smaller firms bearing the brunt of the damage. Moreover, the April WSJ/Vistage Small Business CEO Confidence Index plunged to a record-low of 44.7, down from 91.7 in March. The economic outlook is grim, and the Paycheck Protection Program (PPP) — once seen as a lifeline for Main Street businesses — appears to be insufficient to meet existing demand and, for some small firms, of limited benefit given restrictions in how the funds can be used (the Federal Reserve's $600 billion Main Street Lending Program may offer another avenue for small businesses, but these loans are not forgivable). As states begin to reopen their economies, small business lending activity may improve, but there is reason to be skeptical about the near-term prospects from reopening. For example, data from Homebase indicate that the number of local businesses open in GA and SC are still 35-40% below pre-COVID levels, and other measures of consumer mobility in “reopened” states are similarly muted. The bottom line is that state efforts to move toward a resumption of normalcy should help small businesses weather the storm, but Main Street will continue to suffer until consumers feel safe.

Financial Stress Jumps as Main Street Responds to Pandemic

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due rose 14 basis points (bp) in March, the largest monthly increase in the index history, and is 24bp above its year-ago level. Meanwhile, the SBDI 91–180 Days Past Due inched up 1bp and is now 5bp above its year-ago level.

Regional Story: The sharp increase in delinquencies in March was felt in all ten of the largest states, including Florida (+15bp M/M), Illinois (+15bp M/M), and Georgia (+28bp M/M; its largest-ever monthly increase). Measured on an annual basis, delinquencies increased across all ten large states, led by Georgia (+67bp Y/Y) and Illinois (+47bp Y/Y). Regarding defaults, California (+25bp M/M), Georgia (+20bp M/M), Texas (+19bp M/M), and Florida (+17bp M/M) saw sharp upticks. More positively, defaults declined in Pennsylvania (-5bp M/M), Michigan (-5bp M/M), and New York (-4bp M/M).

Industry Story: In March, delinquencies increased in all major industries, including Transportation (+19bp M/M) and Construction (+16bp M/M), while the smallest increase occurred in Agriculture (+5bp M/M). Notably, Health Care (+13bp M/M) had its largest monthly increase on record and is now at its highest level since 2010. Regarding defaults, the most notable changes in the SBDFI last month involved Accommodations (+26bp M/M; +100bp Y/Y) and Transportation (+19bp M/M; +226bp Y/Y). More positively, defaults fell in Mining (-11bp M/M; -51bp Y/Y), though plummeting oil prices may increase financial stress on the industry in the weeks ahead.

Economic Context

As the country enters the 8th week of shutdowns, most small business are feeling the consequences. To help weather the storm until demand improves, many small businesses have sought relief in the $737 billion appropriated for the Paycheck Protection Program (PPP) and Emergency Injury Disaster Loans (EIDL). While well-intentioned and helpful to many small firms who have received funding, these efforts have been slowed due to programmatic issues, including disbursement delays. NFIB and NSBA surveys from mid-April show that only 20–25% of PPP applicants have received funds thus far, while just 1–5% of EIDL applicants have received loans. Meanwhile, some of the 1.7 million businesses approved for PPP loans are finding that forgiveness conditions (e.g., using most of the funds to maintain payrolls, as opposed to other expenses) are too restrictive. Moreover, some small business owners hoping for loan forgiveness may struggle to rehire furloughed workers due to “enhanced” unemployment benefits, as the average small business employee can earn 108% of their previous wages on unemployment insurance. While small business advocacy groups fight for greater leniency on federal aid, Main Street's resiliency to the pandemic will be tested in the coming months, as delinquencies and defaults will increase rapidly.

For more insights, watch the recording of the May 2020 Small Business Insights webinar.