While small business owners are increasing investments in their companies, overall growth in business is still slow. That’s according to the Thomson Reuters/PayNet Small Business Lending Index, released today.
“Right now we’re in a virtuous phase of the business cycle, but it doesn’t seem to be as strong as it could be,” said William Phelan, president of PayNet. The Index, which measures loan activity among businesses with less than $1 million in credit, shows increases in year-over-year spending for the past 23 months. January is up 18 percent from a year ago.
Even with increased lending, said Phelan, “there’s still a lot of uncertainty.”
Business owners remain spooked by the events of the past four years, and are assuming less risk, he said. “We would have expected more risk-taking, more expansion, more investment. Instead, we’re seeing a plodding expansion,” he noted.
The Index is a monthly outlook based on real-time data, measuring loan activity across 23 sectors, including construction, transportation, agriculture and healthcare.
Phelan pointed to a decrease in manufacturing and an increase in the service sector as one reason there are fewer large capital investments from businesses. “There’s less demand to invest in capital projects in the service sector," he said. “Companies are investing in productivity enhancements, like software and technology. But they’re not hiring; they are holding cash on their balance sheets.”
Still, he expects to see continued increases in lending over the next several quarters. Defaults and delinquencies are low, a sign that business owners could be ready to assume more risk.
Because small businesses can react more quickly to changes in the marketplace than larger companies, said Phelan, the index can be a good predictor of what will happen with the overall economy.
“Small business leads the economy by two to five months,” he said. We saw the index fall dramatically in early 2007, before things fell apart later in the year,” he said. Phelan said he sees, based on small business activity, at least “four more quarters of the wind at our back, as long as we don’t get any shocks outside the system.”
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