Net 30 Blog | Business Credit Tips & Advice » Smalll Business Index

Small Business Index Hits Best Levels Since 2007

Alex Coté — Mon, 26 Jul 2010 12:56:30 +0000

As we do each month, today, we published our latest report of small business payment activities (see chart below). After watching as the gap grew between the payment habits of large and small businesses throughout the worst periods of the recession, both indices have now converged into a tighter pattern. The SBI peaked out in December 2008 at 12.66 days beyond terms and now stands at 7.02 days – the lowest level since we created the index back in August of 2007. This kind of improvement in paying behavior is typically a sign of confidence, as owners and managers feel more comfortable with the expectation of replenishing cash as new business comes in the door. The latest survey results from the NFIB also support a more confident outlook. In May, the NFIB Small-Business Optimism Index recorded another advance, rising 1.6 points to 92.2. The largest index component improvements were found in expectations of economic conditions (+8 points) and plan to increase inventories (+4 points).

Small business payments stabilizing in the face of uncertainty

Alex Coté — Fri, 15 Jan 2010 09:01:06 +0000

Just last month, we reported that small businesses were paying their bills in an increasingly timely manner. After a year of predictable delinquencies, Main Street was exhibiting payment behavior more typical of better times. But as we said then, and as is evidence in the latest NFIB survey, this improving behavior seems to fly in the face of waning confidence in demand, continued weakness in the jobs market, and what remains a less than rosy economic outlook. This month, the numbers (below) were again good – average days beyond terms or DBT went down ever so slightly — remaining fairly consistent with what we’d seen in our November data. Combined this nominal improvement with a slight slowing of payments from big business, and the payment behavior gap witnessed earlier in 2009 had almost vanished – yet another sign that things could be returning to a sort of “normal”. We’ll have to wait a few months to see whether such a trend can be sustained, but the data taken in the context of larger market trends does tend to introduce some rather interesting questions, namely:

Have the most delinquent companies (those paying at 90+ DBT), many of which have outright failed, simply been flushed out of system? In other words, are all business simply benefitting from less drag and write-offs?
Given the scarcity of credit, is it possible to maintain such payment behavior AND invest in growth and expansion (e.g. hiring new staff)?
Are the largest and most critical suppliers forcing smaller partners into increasingly less favorable payment terms?
Have large businesses substantially slowed their payments to their smallest partners, thus putting increased pressure on Main Street to make up the difference in working capital?
Are small businesses, increasingly cognizant of more stringent credit conditions proactively improving their credit ratings in the hopes of securing near-term lending?
Are we witnessing the emergence of a more risk adverse culture among entrepreneurs where opportunity is being weighed against predictability to ensure optimal working capital?

While a blog hardly constitutes a scientific survey, we’d love to get your insight and opinion. To what do you attribute the stabilizing cash flow?

Small businesses paying bills faster. A sign of confidence?

Alex Coté — Mon, 14 Dec 2009 09:41:23 +0000

Today, we published our latest report of small business payment activities (see chart below). After witnessing a growing gap between the payment habits of large and small businesses – as recently as a month ago small businesses payments languished at a 38 percent higher days beyond terms (DBT) than big businesses, who had since returned to pre-recession norms – November data show a remarkable improvement for Main Street shops. Such improvement in paying behavior is typically a sign of confidence, as business owners feel more comfortable in doling out working capital with the expectation of replenishing cash via new business. But the latest survey results from the NFIB make it pretty clear that after months of a more optimistic outlook, small business confidence is once again starting to wane. Adding cold water to the fire is another poll from CNN/Opinion Research Corp., released last week, that revealed consumer confidence in the economy starting to fade. Such data tends to poke some major holes in the confidence theory.

So if confidence is not behind the improving payment behavior, what exactly IS driving down delinquencies? While it’s hard to point to a specific answer in the data – and while one month hardly constitutes a sustainable trend – here are a few possible contributing factors:

Deadbeat Darwinism: We’ve said it before and we’ll say it again. The best way to ensure timely payments is to report, proactively deal with, and do the proper reference checks to avoid deadbeat clients and partners. With growing sensitivities to such risks and forums like our own Cortera Credit Exchange, which make it easy to ‘out’ such delinquents, small businesses may taking the necessary steps to avoid such problems. Serial deadbeats and companies in trouble are therefore less and less likely to be mucking up the system.
Past due debt off the books: Another flavor of deadbeat Darwinism, but this one at the tail end of the cycle. With little or no hope of recovery long outstanding debt – overdue bills – well past 90 days DBT, many businesses simply write it off. Thus, this delinquency data is no longer weighing on the average.
Improved credit management: Perhaps business owners are more sensitive to increasingly stringent lending conditions – and how business credit reports are built – given the notoriously risk adverse position and tight lending habits of banks these days. Maybe they’ve taken our advice and realized that the best way to self manage working capital in the absence of abundant credit availability is to ensure that they and their partners all pay their bills in a timely manner, thus optimizing cash flow throughout the entire system. Regardless of the reason, we may be witnessing an increasing emphasis on better credit management habits for Main Street.

As always, another month’s worth of data will go a long way toward sorting this out. But in the meantime, what do you think is contributing to a sudden improvement in timely payments? We’d love to hear your thoughts and ideas.

The Main Street Credit Squeeze Continues

Alex Coté — Tue, 10 Nov 2009 14:46:23 +0000

The S&P is up over 50% since its March 2009 lows and yet for most of us, the leading indicators and large company earnings seem to defy the reality on Main Street. Newsweek offered a view on why such a gap may exist – and some indicators are emerging to focus on small business sentiment — but the fact remains that most prominent economic indicators fail to paint a true view of Main Street conditions. Last month we started publishing a small business index that takes a shot at filling the gap. Based on same criteria lenders and businesses use for determining credit viability, the SBI provides a view into the cash flow on Main Street. And just as Newsweek paints the picture of the Wall Street – Main St gap, the Cortera SBI™ shows increasingly divergent behaviors between the largest of businesses and the nation’s millions of small companies.

The result is a one sided recovery. The latest data shows that while big businesses have returned to their pre-recession levels of two years ago, small business still remain over 28% higher (paying bills later) than our October ’07 report numbers. Simply put, small businesses are still paying slower than big businesses in an effort to manage their cash flow. Without any additional forms of lending at their disposal, slowing payments is their last resort. The gap, while narrowing slightly in our October Report, still stands at over 38% slower for small businesses as compared to big businesses.

Dual credit crunch conspiring against a recovery?

Alex Coté — Thu, 15 Oct 2009 01:26:13 +0000

On Monday, the New York Times detailed how the worsening credit conditions are affecting small businesses, as banks take on an increasingly risk adverse approach to lending and credit lines. Yesterday we talked about how small businesses are getting squeezed by increasingly late payments. Today, the Dow closed above the 10,000 mark for the first time in a year, buoyed by better than expected earnings from a few bellwethers and early signs of improving consumer confidence. The common thread in all of these events? Conditions do indeed seem to be improving for many of the nation’s large businesses. Unfortunately, a dual credit crunch conspires to thwart similar growth by the small businesses that make up the majority of the nation’s jobs engine and 50% of the GDP.

The NY Times article covered the familiar credit crunch: small businesses can’t get the loans and credit lines they need to expand operations, grow payrolls and pay their bills. In contrast, Cortera’s new Small Business Index™ focuses on the other side of the credit coin: Trade credit. Trade credit focuses on payments terms and behavior for advance products and services (e.g. inventory) – and more specifically cash flow.

What is interesting is that big companies are forcing their smaller customers to pay them faster, yet within our SBI we can see that these same small businesses now are taking longer to pay everyone else. And the Times reported, “As the financial crisis has largely eased in recent months, big companies have found credit increasingly abundant, with bond issues sharply higher.” Thus large businesses have been largely immune to the dual credit pressures facing small businesses.

To understand this dual credit crunch and its implications, one need look no further than cash flow. Many small businesses live under a tight cash conversion cycle so if they are pushing cash out the door quickly for one class of suppliers (big companies), but not being paid quickly enough by their own customers (other small businesses) then they can’t pay their own bills. Given that small companies have less access to other forms of lending (the larger credit crunch) that once they get behind it’s hard to catch up and harder to reinvest in business growth.

You can see how this starts to spiral if small businesses can’t tap other sources of lending to manage these cash crunches. Small businesses lack a financial cushion that large businesses enjoy through alternative cash sources like securitizing accounts receivable, new bond offerings, and new equity. Their only choice for a short term loan is to use their suppliers and stretch out payments. Essentially small businesses end up paying their smaller suppliers (that likely have less clout) more slowly as a form of a short term loan until more cash comes in the door (or they have to make cuts in other areas with layoffs, reduced hours, less inventory etc…).

The all too often result is, at best, little investment in growth (new products, hiring, expansion) and at worst leads to even more cost cutting (pay freezes, reduced hours, layoffs or even closures).

Such conditions require far more diligence when it comes to evaluating the credit viability of business partners and customers, and they require keeping a close eye on the changing payment behaviors of existing partners to detect early signs of risk.

As a small business owner, how are you managing this crunch? We’d love to hear your story and tips for surviving.

Small Businesses Getting Squeezed from Both Ends

Jim Swift — Tue, 13 Oct 2009 13:05:08 +0000

A few weeks ago, The Wall Street Journal explained how small companies are getting paid more slowly by their large company customers while those same large companies are forcing the little guys to pay faster. Well, Cortera’s data is showing that the little guys are getting paid more slowly by their small business customers, too.

Our Small Business Index (SBI) shows that while small businesses (companies with less than 500 employees – the SBA definition) are improving, but they’re paying 25% slower than a year ago and 20% slower than the overall business average. It is also important to note the widening gap between big companies and small companies. Pre-recession, the measures for the average, small and big companies tracked in a tight range, but since late 2008 we’ve seen a significant gap open up. Small businesses have a 55% higher DBT than large companies.

This is a dangerous situation for small businesses and a bad trend for the economy as a whole. When the payment flow between small businesses slows, the resulting friction impedes their ability to plan, grow and sometimes even survive.