Small Business Lending Picks Up Amid Rising Delinquency and Default Rates

THE FINANCIAL LANDSCAPE FOR SMALL BUSINESSES WITNESSED SIGNIFICANT POSITIVE SHIFTS IN AUGUST, as reflected in the latest data from the Equifax Small Business Lending Index (SBLI). This measure of small business lending activity experienced a substantial surge of 12.4%. This surge in the SBLI marks a remarkable 6.7% increase compared to its standing just a year ago.

Furthermore, the 3-month moving average of the SBLI showed an uptick of 1.3% in August, which stands 3.6% higher than its year-ago counterpart. This change signifies a sustained positive trend in small business lending.

The Equifax Small Business Delinquency Index (SBDI) 31-90 Days Past Due category registered its first monthly decline in 18 months, reaching 1.67% in August. 

Meanwhile, the SBDI 91–180 Days Past Due category experienced a slight uptick, reaching 0.52%, reflecting a 16 basis point increase compared to the previous year. Moreover, defaults also rose, totaling 2.72%.

These complex and multifaceted developments underscore the dynamic nature of small business financing in the current economic climate. 

Regional Analysis

In August, small business lending rose in four of the ten largest states, with three states hitting series highs. Measured annually, lending activity increased in nine of the ten largest states. On an annual basis, California was the only large state to experience a decline in lending activity. Additionally, delinquencies eased in seven of the ten largest states while eight out of ten of the largest states experienced an increase in defaults in August, led by Texas and Georgia. 

Industry Analysis

Small Business Lending: 

• SBLI rose on a monthly basis in 13 of 18 industries in August, led by Public Administration, Mining, Quarrying, and Oil & Gas Extraction and Information. Industries in which lending activity weakened include Agriculture, Transportation & Warehousing and Retail. 

• Compared to a year ago, lending rose in 14 of 18 industries, most notably in Arts, Entertainment & Recreation and Education. In contrast, lending fell significantly in Transportation & Warehousing and Agriculture. 

Small Business Delinquency:

• Of the six tracked industries in August, delinquencies rose for two, were flat for two, and decreased for two. 

• SBDI rose for Transportation, where monthly delinquencies have increased by double digits for the last 11 of 12 months. 

• On an annual basis, delinquencies climbed in all six tracked industries, led by Transportation. 

• Defaults increased in 12 of the 18 tracked industries in August, led by Information and Retail. Education saw the largest monthly decline. 

• On an annual basis, defaults rose in all 18 tracked industries, led by Transportation and Accommodations. 

Economic Analysis

In August, the Equifax Small Business Lending Index bounced back after two months of decline; however, the index's modestly positive performance over the last three months suggests potential headwinds, with higher borrowing costs and tighter credit conditions expected to impact small business lending ahead.

“A recent Equipment Leasing & Finance Association survey highlights a shift toward cost controls among commercial lenders, indicating potential credit quality and availability deterioration in the coming months,” said Bill Phelan, General Manager of the Equifax U.S. Information Services (USIS) Commercial business. “Despite these challenges, there's a potential silver lining in the reduction of inflation. While the Fed remains cautious, there is room for potential rate reductions later this year that could lead to stimulating Main Street lending.”

However, small business financial stress persists, especially in Transportation, which has seen soaring delinquency and default rates. Despite supply chain improvements, recent trucking bankruptcies reveal ongoing challenges, driven by rising insurance and fuel costs, and worker shortages. Small businesses are also facing growing concerns over near-term sales as consumer spending, a post-pandemic growth driver, faces pressure from rising credit card debt, high-interest rates and impending U.S. Federal student loan payments. 

“While the economic landscape remains dynamic, small businesses continue to demonstrate resilience in the face of adversity,” said Phelan. “By staying vigilant and embracing opportunities for growth and adaptation, businesses can look forward to a more prosperous future.”

Produced monthly, the Small Business Indices help lenders and businesses track changes in the small business marketplace by providing insights into lending, default, and delinquency trends. To learn more and view the latest reports, check out our Small Business Indices page.