CHICAGO The tiniest U.S. small businesses, which led the broader economy into the past two recessions and are widely regarded as the best hope for job creation in any recovery, are showing signs of improved confidence and financial health, according to a new study.
The examination of loan, lease and line of credit activity conducted by PayNet Inc for Reuters found that U.S. businesses with less than $100,000 in outstanding debts began borrowing again cautiously this spring to invest in their businesses -- a trend that continued through the end of the study period in September.
Financing originations among these so-called microbusinesses are still down year-over-year. But they are no longer falling faster than originations for larger-sized small businesses -- those with borrowings above $100,000 -- as they were for nearly three years running.
"This looks like an inflection point," said William Phelan, the president of PayNet, which provides risk management tools to the commercial lending industry.
"These little businesses are a leading indicator and the signals they're sending are improving."
Another encouraging sign, according to PayNet? Delinquencies among these microborrowers peaked this spring and have improved steadily since then.
In past downturns, microbusinesses businesses have led their larger counterparts in and out of the slumps.
In the recession at the start of this decade, for instance, delinquencies by businesses with less than $250,000 in borrowings peaked in January and February of 2001, just as the downturn was officially beginning, according to PayNet's analysis.
Delinquencies by businesses with borrowings of between $250,000 and $1 million did not peak until January 2002, according to PayNet -- months after the recession officially ended. And delinquencies by even bigger borrowers peaked only in March 2003 -- more than a year into the rebound.
Given the correlation between microbusiness borrower delinquencies and GDP, Phelan said the data provided another encouraging sign the economy may be in recovery.
So far, much of the recovery has been driven by the government emergency stimulus efforts, including the popular "cash for clunkers" incentive for new auto purchases and an $8,000 tax credit for first-time home buyers.
Experts say a sustainable recovery needs to come from real demand, both from consumers and private industry, especially small businesses, which are widely regarded as the job-creating engine of the U.S. economy.
Critics have blasted the big banks that received government bailout money, claiming the lenders have failed to turn around and seed the economy by reopening their small business lending windows.
In recent weeks several of the country's biggest finance names, including Citigroup, J.P. Morgan and Goldman Sachs Group Inc -- have announced plans to boost small business lending.
PayNet collects real-time loan information, such as originations and delinquencies, from more than 225 leading U.S. capital equipment lenders.
The company's proprietary database encompasses more than 16 million current and historic contracts, worth $700 billion.
More than half the money invested in plants, equipment and software in the United States in any given year is financed with loans, leases and lines of credit.
(Reporting by James B. Kelleher, editing by Matthew Lewis)