Five Steps for Business Loan Planning in 2013: Quantifiable Data and Analysis Provide Insight into Lending Trends, the Financial Health of Small Businesses, Future Projections of Risk, and the Current Stage of the Business Cycle. This Data May Surprise You

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Business planning for 2013, one of the most difficult jobs in corporate America this year, is now under way in board rooms, conference rooms, and executive offices across the country. The uncertainties facing business managers remain well defined: the fiscal cliff, health care implementation, tax policy, the federal deficit, and elections, to name only some.

As they shape their plans for 2013, businesses are seeking insights into how the economy may play out over the next year. Specifically, they are trying to 1) determine how much to invest in new property, plants, and equipment, including technology; 2) define hiring plans; and 3) decide whether to pursue acquisitions.

Meanwhile, financial institutions will be asked to respond to the loan requests those decisions will generate. But will bankers put their foot on the accelerator and grant more credit, or will they jam on the brakes? The answer will contribute to each bank's performance and ultimately shape the U.S. economy.

A major decision facing banking executives centers on capital planning. Is now a good time for banks to accumulate more capital, or should they put more capital to work? If bankers decide to keep their foot on the gas, what can they expect the return on capital to be?

The changing composition of the U.S. small-business economy also presents different rewards for lenders. This article presents a five-step road map to help bankers develop business plans for 2013, based on a study of private companies with C&I loan exposures of less than $1 million--the category of small-business borrower. Insights supported by quantifiable data are meant to help banks make smarter decisions about safe growth sectors and prepare their portfolios for the ever-changing business cycle.

A Study of Small Businesses

The media, policy makers, and business community all acknowledge the central role of small businesses in the U.S. economy. Publicly available information on small businesses, such as annual revenues or number of employees, relies on estimates rather than hard data. In an ideal world, the financial statements of small businesses would be as readily available as those of public corporations. However, in the absence of financial statements, and for the purposes of this study, PayNet defines a small business to be one with $1 million or less in total loans outstanding. Loans outstanding represent one of the best measures of business size, as they are objectively reported by a third party, the lender, as opposed to being self-reported or estimated.


A cross section of U.S. small businesses serves as the sample for this study. This sample, extracted from PayNet's proprietary database, reflects the geographic and industry makeup of the small-business economy in the United States. PayNet's database encompasses information on nearly $1 trillion in financial contracts by millions of small businesses in the U.S. and is updated with real-time information each month. Through state-of-the-art analytics, this real-time data is converted into market intelligence and predictive tools that can be used to lower the cost of credit granting and portfolio management.

Summary statistics on this sample show the average loan amount to be just under $60,000. The average high credit per business is roughly $350,000, and the average term of all financial obligations is 55 months. Loan types encompass long-term obligations such as term loans, commercial leases, and credit lines used for long-term investment in expansion of property, plants, or equipment.

Because small businesses react so quickly to economic inflection points, their borrowing and payment behavior is a very good source for leading economic indicators. From this data, PayNet creates a series of analytics and indices that are representative of U.S. small businesses. Historical loan default rates will be reported to put credit risk on small business loans into context as a separate asset class. …