Third quarter 2020 data recently published in the Experian/Moody’s Analytics Main Street Report reveals disturbing trends in the world of commercial credit. The report offers insight and commentary into the current state of business credit — which today, thanks to the continuing COVID crisis — is tenuous.
Main Street is borrowing from Peter …
The Main Street Report confirms what we’ve all assumed: Many businesses turned to borrowing to combat first and second quarter COVID-related losses. For some, increasing debt load was the only alternative to closure or layoffs. Others, though, were forced to borrow in addition to reducing their workforce.
According to the report, small businesses (those with one to 49 employees) have lost more than two million jobs year over year. At the same time, the FDIC shows that commercial and industrial (C&I) loans are alarmingly high. The agency’s second quarter 2020 report Loans to Small Businesses and Small Farms Report reveals the following:
- All loans and leases (business and personal) balances are up by 8% over second quarter 2019 – the highest annual increase since the first quarter of 2008.
- C&I lending is up 21% over the second quarter of 2019.
- C&I loan portfolios increased by 15.4% over the first quarter of 2020.
This lending isn’t all new loans, but includes draws on existing credit lines. Commercial lines of credit have reportedly reached a 37% utilization rate, says the Main Street Report, leaving “quite a bit of room for balances to rise.”
…To pay Paul
While this increased lending might seem like good news on the surface, the Main Street Report explains that it’s most likely harkening to a bigger problem: delinquencies.
“Increasing borrowing is helping to mask rising late-stage delinquencies and bankruptcy,” the report reads. “Layoffs and borrowing can only mask weakness for so long until a reckoning will arrive.”
Indeed, these inflated loan balance numbers have resulted in a mathematical decrease in the percentage of current business lending delinquencies. Bankruptcies in the third quarter of 2019 were 0.16%; at the end of the same time period of 2020, they remain at 0.16% — the same percentage, but a higher raw number.
At the same time, the Main Street Report cites decreases in moderately and severely delinquent business accounts, which are 0.18% and 0.63% lower, respectively, than at the same time in 2019.
What this means for you as a data furnisher
To use the Experian/Moody’s report authors’ expression, this overall data “presents a rosy picture for business credit but can distract from what these funds are being used for.” In other words, business owners are borrowing to survive, not thrive. They’re using loan funds to make payroll and keep their doors open, not to hire new employees or open new locations.
The Main Street Report predicts a “winter of pain” for small businesses, assuming that any government stimulus help will not take effect until 2021 and the COVID-19 crisis will continue until a vaccine is widely available.
As a commercial lender and data furnisher, you should be prepared for potential business shut-downs, bankruptcies, and a wave of increasing delinquencies. To protect your own organization, stay tuned to Datalinx and government news outlets to remain aware of pandemic-related changes to credit reporting guidelines.
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