Credit 101

Where America’s Small Businesses Are Succeeding

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Small businesses in the U.S. have improved their credit profiles, but certain areas of the country have seen more success than others. Looking at small business credit performance from the second quarter of 2013, Experian and Moody’s Analytics found stronger credit among businesses in the western United States, particularly in the Mountain West.

On a national level, the picture is encouraging. The Experian/Moody’s Analytics Small Business Credit Index increased 2.8 points from the first quarter to 111.7, the highest it has been since the creation of the index in 2010.

“Fewer businesses are delinquent, and more businesses are getting paid faster,” said Joel Prius, senior business consultant with Experian Global Consulting Practice. He outlined second-quarter small business credit quality in a webinar Sept. 24, along with Nate Kelley, associate economist with Moody’s Analytics, and Cristian deRitis, senior director of Moody’s Analytics.

The Continental Divide

Geographically dissecting the data showed an uneven recovery, with Western states reporting the best credit quality, in large part due to healthy construction activity and income growth.

Several Western cities, including Phoenix, Houston, San Francisco, Las Vegas, San Diego and Salt Lake City, were among the top 10% for credit quality among metropolitan areas. Conversely, four metro areas in Florida were in the bottom 10%: Miami, Orlando, Fort Lauderdale and West Palm Beach.

The report identified several states as “leaders and laggards” of several credit components. Idaho, Wyoming, Utah and Arizona boasted low delinquency and bankruptcy rates, while several Eastern states trailed national averages in those areas. The so-called laggards included Massachusetts, New Jersey, Pennsylvania, Maryland, Virginia, North Carolina, South Carolina and Florida. Illinois, the lone Midwesterner among these extremes, also reported dismal small-business credit quality.

Here are some numbers for comparison. The real estate business delinquency rate in leader states was 2.62%, and 18.15% in laggard states. Construction businesses, which have the lowest credit quality across the nation, pay their bills about 11.14 days late in leader states and 13.46 days late in laggard states. However, Western states report higher small-business bankruptcy rates than their eastern counterparts.

Just like with consumer credit, late payments and bankruptcy can trash business credit.

The regional divide makes sense. From May 2012 to 2013, single-family home prices rose 20% on average across Western states, and expanding manufacturing facilities boosted construction activity in the region.

“Rise in home equity is going to lead to a boost in consumer spending,” deRitis said.

Consumers seem to be in better shape out west. The average unemployment rate among leader states is 6.1% (Arizona is highest with 8.3%), and laggard states are above the 7.3% national average at 7.7% (Illinois brings down the pack with 9.2% unemployment, and Virginia levels it with 5.8%).

Furthermore, the report highlighted the concentration of higher-paying jobs available in the west, and population-change statistics show consumers moving to where those jobs are. And with home equity rising, small-business ventures are more practical, since many startups are getting going with home equity loans.

“Growing bank account balances give would-be business owners the confidence to strike out on their own,” Kelley said.

Image: Fuse

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