Staying Ahead of the Curve: Evaluating the Risks of Small Business Borrowers

By Carr, Matthew | Business Credit, January 2008 | Go to article overview

Staying Ahead of the Curve: Evaluating the Risks of Small Business Borrowers


Carr, Matthew, Business Credit


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The credit market turmoil has been playing havoc for industries across the globe, especially with reports predicting as much as $35 billion in corporate defaults on the horizon. Of course, leading the charge towards collapse has been the troubled subprime mortgage market that has sparked Congressional intervention, while some of the nation's largest banks have watched profits shrink by billions on writedowns. With the economy expected to be a rough ride the next couple of quarters, spurred on by the tumbledown impact of the subprime mortgage sector, creditors and grantors have had to rein in lending practices.

This scenario is starting to take its toll on smaller firms, leading to the question: are small businesses really becoming a greater credit risk?

"Yes. Absolutely," stated Dan Meder, vice president of marketing and product development for Experian Business Solutions. "It's a whole domino effect. There's less discretionary income, less money to spend elsewhere and folks themselves are struggling to get additional capital to finance their businesses. You can see it's almost a vicious cycle."

The United States is a land built on entrepreneurs and innovators, and the 'American Dream" of being self-employed has thrived throughout the years. According to the Small Business Administration (SBA), the United States is home to more than 25.5 million businesses representing some $917.8 billion in revenue. That translates to about one business for every 12 people in this country. Looking at the picture in that light helps digest the inescapable reality that the majority of the businesses in the United States are small. SBA statistics show that 99.7% of firms with employees were considered "small firms" and the vast portion of businesses, 89%, in the country have revenues of $1 million or less per year. A miniscule fraction, only 0.8% of domestic businesses ever top more than $10 million per annum in sales.

What this all boils down to is that practically all of the businesses that credit managers and credit departments are dealing with are small businesses, which can also be a notable risk category for defaults. Over the past year, the credit market crunch has taken its toll on the small business sector, making it exceedingly more difficult for small businesses, as grantors are pulling back on available lines of credit, while businesses themselves have been much more cautious about utilizing available credit because of uncertainties surrounding the health of the U.S. economy.

Sitting on the Edge of Another Bubble?

Despite contributing 50% of the U.S. Gross Domestic Product (GDP) and accounting for two-thirds of the jobs in the country, small businesses find themselves afloat in a sea of anonymity and faltering success, with less than half of businesses expected to ever see their fifth anniversary. Service and retail businesses are struggling to grow, with only 37.3% of service businesses and 31% of retail businesses classified as "growing," or producing 25% above normal growth patterns.

The fate of small businesses is not going unnoticed. The U.S. House of Representatives and the U.S. Senate have made headway on advancing several bills that are designed to gain ground on the more than $60 billion capital shortfall that small enterprises face in the United States. Twined with these efforts is that SBA loan guarantees continue to push forward at a record-breaking pace, with more than 110,000 loans worth more than $20 billion approved in the last year. Since 2000, the number of SBA loans has doubled, and since the start of the millennium, the agency has doled out more than 555,000 loans worth more than $107 billion, more than the previous 10 years of lending combined.

On top of the federal focus, with the small business sector being such a key cog in the nation's economy, financial industry spending on the small business market is expected to increase 12. …

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