Tighter Credit Conditions Cause Small Business Lending Activity to Wane

By Staff Writer Atlanta Trend

• Jul 27, 2023

The Equifax Small Business Lending Index (SBI) reports a significant decline in April. Falling by 8.4 points (-5.4%) to 147.4, the drop in the Small Business Lending Index could be a reflection of prominent bank failures having an influence on tightening of credit standards among lenders. Surveys also point to the trend of reduced credit access continuing into later this year as banks tighten their small business lending standards. And although the Equifax Small Business Lending Index remains 3.2% higher than this time last year, the Equifax Small Business Delinquency Index (SBDI) and the Small Business Default Index continued a downward trajectory in April, seeing numbers roughly in line with pre-pandemic readings. 

“The most recent data reflects an unsettled environment for small business lenders,” said Bill Phelan, General Manager of the Equifax USIS Commercial business. “While we continue to see year-over-year growth in lending activity, seeing an increase in delinquencies and defaults suggests that businesses are having more difficulty repaying their loans or, with tighter restrictions in place, obtaining them.” 

Based on the most recent report, inflation and uncertainty continue to be hot topics in the market. Lending is not keeping pace with inflation and economy-wide price increases, which means this capital simply doesn’t go as far as it once did. At the same time, wage growth and job growth are still strong, even as banks tighten lending standards and over 50% of business owners plan to delay or reduce capital spending. 

According to industry data, small business lending experienced monthly growth in eight industries during the month of April. Health Care & Social Assistance (+2.7% M/M), Arts, Entertainment & Recreation (+2.5% M/M), and Public Administration (+2.4% M/M) recorded the most substantial increases. Lending activity declined the most in Information (-2.9% M/M) and Mining, Oil & Gas (-2.1% M/M). When compared to the previous year, transportation noticeably reduced, experiencing declines in lending activity (-11.7% Y/Y), as well as leading delinquencies (+148bp Y/Y) and defaults (+232bp Y/Y). 

“Main Street business owners will continue to face challenges,” added Phelan. “As loans become harder to access, interest rates continue to rise and financial stressors, it is vital small business owners manage their financial health effectively in the months ahead.” 

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.