2011 Small Business Outlook by PayNet

PayNet’s 2nd Quarter Outlook shows small business is primed for growth, they just need demand to set it off.
The $800 billion of data PayNet tracks monthly reveals that there is major growth potential in small business
investment. The Thomson Reuters/PayNet Small Business Lending Index (SBLI) rose during March to 88 from
86 in February. This was also a 12% increase over last year which is significant for the US economy when small
business represents $7 trillion of domestic production and accounts for most new jobs. Economists have
found the SBLI is a leading economic indicator anticipating GDP changes by 2-5 months.

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Figure 1: Thomson Reuters/PayNet Small Business Lending Index

Jump Starting the Small Business Economy

A question on everyone’s mind is how to jump start the small business economy and create more jobs.
In 2007 the SBLI peaked at 131. With the SBLI at 88 today, small business has room to grow over 50% by
investing in new property, plant and equipment. PayNet advised Congress in testimony last February that
their policies must create certainty for small business. PayNet discovered from the data that a typical small
business investment averages 4 years. Since the 2010 Tax Extenders Bill covers only the next 2 years, any new
investment project is a gamble in years 3 and 4. We can see from the slow progress of the SBLI this fosters a
“wait and see” attitude towards future investments by small businesses.
6.50%
However, trends in theAvg.SBLI show small business is exhibiting signs of life:
of High Delinquency Lenders
6.00%
• Small borrower Overall Average
originations have increased eight of the past ten months.
5.50% Avg. of Low Delinquency Lenders

• The level of originations is up 34% compared to the low point reached in May 2009.
5.00%
• Despite the noted increases, originations are still 33% below the peak reached in January 2007.
4.50%

4.00%

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%
Credit Conditions
The issue remains the same – limited demand for credit reflects a lack of investment projects to form new capital. During good
times and bad, borrowers hedge their bets and regularly apply to multiple lenders for the same loan. Credit shopping enables
borrowers to seek the lowest interest rate or better loan covenants which are more favorable and lower cost. Credit shopping is
also a key indicator of demand for credit – when economic times are toughest borrowers shop less lenders for their credit. PayNet
studied the average number of lenders that each borrower applies for credit and determined that small businesses are shopping
for capital among the fewest lenders since 2005. PayNet’s data shows credit shopping decreased 10% since the beginning of the
financial crisis when businesses applied to multiple lenders for credit.
What surprised us most in this release is how small business balance sheets are nearly pristine. PayNet’s analysis of small business
delinquency trends provides evidence of this.
6.50%
• 30 day delinquency continued
Avg. of High Delinquency Lenders
6.00% to decrease in March 2011,
Overall Average
down another 27 bps since
5.50% Avg. of Low Delinquency Lenders
February 2011 to 2.15%.
5.00%
• Loan delinquency was down
4.50% 44% in March 2011 compared
4.00%
to March 2010, the largest year-
over year decrease since the
3.50% time series began in 2005.
3.00% • Lenders experiencing
2.50%
decreases in delinquency
outnumbered those
2.00% experiencing increases in
1.50% delinquency by almost 4
to 1, and almost half of all
1.00%
lenders had decreases of 50
0.50% bps or more; the few with
delinquency increases were
0.00%
generally construction industry
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Figure 2: Small Business 30 Day Delinquency

The relative health of small business credit 3.5%

varies by geographic region. We see in the West Central Northeast South
data the Southeast offered the lowest quality 3.0%
assets. The Atlanta Federal Reserve Bank
Region topped all regions at 2.9% moderate March 2011 National Avg.

loan delinquency. Minneapolis experienced 2.5%

the lowest delinquency rate at 1.1% while the
entire Central Region’s delinquency was 50%
below the National Average. 2.0%

1.5%

1.0%

0.5%

0.0% San Kansas City Minneapolis Chicago St. Louis Cleveland Boston New York Philadelphia Richmond Atlanta Dallas
Francisco
Mar. 2011 2.5% 1.0% 1.1% 1.3% 1.8% 1.6% 2.2% 2.1% 2.0% 2.8% 2.9% 2.4%

Figure 3: Small Business 30 Day Delinquency by Federal Reserve District

Looking Ahead
Small businesses are on steadier ground than at any time since 2007.

PayNet AbsolutePD®
Industry Historical Default Rates
Forecasted Default Rates
2006 2007 2008 2009 2010 2011
Construction 2.4% 3.6% 5.4% 9.0% 6.7% 3.8%
Retail 3.2% 3.4% 4.5% 6.7% 4.7% 3.7%
Transportation 3.4% 5.4% 7.7% 9.3% 6.0% 3.3%
General 2.6% 3.5% 3.8% 5.2% 3.1% 2.9%
Health Care 2.5% 4.0% 3.7% 4.0% 3.1% 2.8%
Agriculture 2.3% 1.6% 1.8% 2.8% 2.8% 1.6%
All Industries 2.7% 3.8% 4.7% 6.4% 4.3% 3.0%

The figures in the above chart indicate how risk is predicted to improve in various industries.
• Transportation and Construction companies improve most with a 45% decrease.
• Agriculture risk falls to the lowest level in 6 years.
• Small retail stores steadily improve.
Based on these projections, fewer small businesses will default which means less will go out of business in 2011.

About PayNet, Inc.

PayNet is the premier provider of risk management tools and market insight to the commercial credit industry, collecting
real-time loan information from more than 250 leading U.S. lenders and turning it into actionable intelligence.
PayNet’s proprietary database – updated weekly – is the richest and largest collection of commercial loans and leases,
encompassing more than 18 Million current and historic contracts worth $800 Billion.
Using state-of-the-art analytics, PayNet converts raw data into real-time market intelligence and predictive information that
subscribing lenders use to manage risk, lower operating costs, originate more loans, and improve their business strategy.
PayNet Contact Information

PayNet, Inc.
5750 Old Orchard Rd., Suite 250
Skokie, IL 60077
866-825-3400
www.paynetonline.com

William Phelan
President
866-825-3400
bphelan@paynetonline.com

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