October 1, 2013 / 9:02 AM / 6 years ago

Small business borrowing rises in August, slowly

(Reuters) - Borrowing by U.S. small businesses edged up in August, pushing an index of borrowing to a six-year high.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1 percent to 116.6, the highest level since August 2007. The index registered 115.4 in July, revised from an initial reading of 117.7, PayNet said on Tuesday.

Historically, PayNet’s lending index has correlated to overall economic growth one or two quarters in the future.

The reading came as investors were boosting expectations the Federal Reserve would likely reduce its massive stimulus program in September.

Those expectations, however, were misplaced. The Fed decided at its meeting last month that the economy was not strong enough to justify reductions in stimulus, and it reiterated its promise to keep buying bonds until the labor market strengthens further.

Because small companies typically take out loans to buy new tools, factories and equipment, more borrowing could signal more hiring ahead.

But the sluggish pace at which borrowing is increasing makes accelerated growth in jobs unlikely, PayNet President Bill Phelan said.

“I would expect continued slow growth in the economy,” Phelan said in an interview.

The outlook for the jobs market is crucial to the Fed’s decision on whether to cut back on its bond-buying stimulus, with Fed Chairman Ben Bernanke saying he wants further proof of labor market strengthening before doing so.

Reduced stimulus may paradoxically push small businesses to speed up borrowing, Phelan said, as they move to lock in low rates.

"Once tapering occurs... those are the conditions that make it ripe for small businesses to start to invest and expand," he said. (For a video of the interview, please see reut.rs/1b9w8pX)

Low financial stress at small businesses, with more of them

paying back loans on time, could bode well for future borrowing.

Delinquencies of 31 to 180 days fell in August to an all-time low of 1.48 percent of all loans made, according to the Thomson Reuters/PayNet Small Business Delinquency Index.

Accounts overdue as a percentage of all loans have fallen steadily since rising as high as 4.73 percent in August 2009.

PayNet collects real-time loan information such as originations and delinquencies from more than 250 leading U.S. lenders.

Additional reporting by Rhonda Schaffler in New York; Editing by Leslie Adler and Chizu Nomiyama

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