Due to a rise in credit balances and a decrease in delinquency rates, small business credit quality continued to show significant improvement in the third quarter.
According to Experian/Moody’s Analytics, the Small Business Credit Index rose 2.3 points to 118.5, up from 116.2 the previous quarter. This notes the index’s third consecutive quarterly improvement, and its second consecutive record-breaking mark.
The index measures credit quality at firms with fewer than 100 employees.
While total outstanding balances have risen at their fastest rate in two years, delinquency rates have fallen at a consistent pace, the data showed. In the third quarter, only 10%, which is the smallest percentage since the recovery began, of outstanding small business credit balances were past due, down 0.7% since the third quarter in 2012.
“Small businesses are getting their finances in order. Lower delinquency and stronger credit growth bode well,” said Mark Zandi, chief economist at Moody’s Analytics. “It won’t be a straight line up for small businesses, and the recent government shutdown hurt, but their prospects are improving.”
From a regional perspective, the index showed that small businesses in the West continued to have stronger credit profiles than their Eastern counterparts.
For instance, small businesses in Utah displayed strong credit performances, as past-due balances for businesses comprised a mere 1.1% of their total balances, according to the data. Conversely, small businesses in Florida have shown the weakest credit performance, as nearly 25% of all balances are paid beyond contracted terms.
The reduction in past outstanding balances and improved payment performance by small businesses has provided them with the ability to increase credit balances in the third quarter, said Joel Pruis, Experian’s senior business consultant.
“Moving forward, it is imperative that small businesses maintain the discipline demonstrated over the past several quarters,” Pruis advised. “The ability to build and maintain a strong credit profile will help them obtain the appropriate funding to uncover new growth opportunities.”