The PayNet Small Business Lending Index (SBLI) recovered in June, increasing 16 points (13.8%) to 132.1, and is now just 3.7% below its year-ago level. The SBLI three-month moving average increased 2.9% but remains 20.9% below its level from June of last year.

Lending expanded modestly in four of the 10 largest states in June — the first positive movement among the 10 largest states since March. Growth occurred in Ohio (0.9% M/M), Michigan (0.7% M/M), Illinois (0.4% M/M) and California (0.4% M/M), while lending activity ticked down in New York (-1.2% M/M), Georgia (-0.4% M/M) and Florida (-0.3% M/M). Over the last year, lending conditions have weakened the most in Illinois (-10.2% Y/Y), Pennsylvania (-9.7% Y/Y) and Florida (-8.8% Y/Y).

Lending activity improved in five of 18 industries in June, led by construction (0.8% M/M) and mining, oil and gas (0.9% M/M). Lending declined in several other industries, including arts, entertainment and recreation (-3.7% M/M) and accommodation and food services (-2.6% M/M), while information (-2.6% M/M) fell to an all-time low. Compared with a year ago, transportation and warehousing (-15.6% Y/Y) and arts, entertainment and recreation (-15.9% Y/Y) remained the worst performers, although public administration (8.3% Y/Y) and construction (5.2% Y/Y) continued to exhibit growth.

The SBLI showed improvement in June, consistent with improving economic data. The NFIB Small Business Optimism Index increased 6.2 points to a COVID-19-era high of 100.6, while June retail sales rose 7.5% month over month and reflected positive year-on-year growth. However, in recent weeks coronavirus cases in the South and Southwest have surged, dampening economic activity and causing the recovery to stall. 

Credit card data published by JP Morgan Chase showed consumer spending flatlined at 10% below year-ago levels in mid-July, while the percentage of small businesses that are closed climbed from 12% to 15% during the first three weeks of July, according to Opportunity Insights. Small business owners do not expect a return to normal levels of economic activity until at least 2021, according to a recent NFIB survey, and temporary layoffs and business closures are becoming permanent as the recession’s “knock-on” effects take their toll on the economy. The number of permanent job losses increased 26% in June, while Yelp data showed 55% of pandemic-era closures on its site are now permanent. While the strong recovery in June small business lending was certainly a welcome sign, more recent developments suggest the operating environment for Main Street will remain weak until the public health crisis is controlled and businesses are able to return to quasi-normal operations.

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due declined by 11 basis points in June but remains 70 basis points above its year-ago level. The SBDI 91–180 Days Past Due rose five basis points in June (19bp Y/Y), while defaults jumped 25 basis points in June to 3%, the highest point since mid-2011 and 81 basis points above December 2019 levels.

Delinquencies fell in nine of the 10 largest states in June, led by steep declines in Georgia (-27 basis points M/M), Florida (-21 basis points M/M) and Michigan (-16 basis points M/M), while Illinois (one basis point M/M) experienced a slight uptick. However, delinquencies continue to rise on a year-over-year basis, as seen in New York (111 basis points Y/Y), Florida (107 basis points Y/Y) and California (81 basis points Y/Y). In contrast to the modest monthly improvements in state SBDIs, defaults continued to surge in June as the headline U.S. index (25 basis points M/M), Florida (38 basis points M/M), Michigan (28 basis points M/M) and New York (49 basis points M/M) all recorded their largest-ever monthly increases.

The SBDI’s improvement in June was driven largely by sharp monthly declines in delinquencies for construction (-39 basis points M/M, +22 basis points Y/Y) and transportation (-31 basis points M/M, +51 basis points Y/Y). Meanwhile, agriculture (+3 basis points M/M, +18 basis points Y/Y) and retail (+3 basis points, +133 basis points Y/Y) increased to 10-year highs, while healthcare delinquencies (10 basis points M/M, 121 basis points Y/Y) rose to their highest point ever. Similarly, defaults are up for every tracked industry, with information (67 basis points M/M, 49 basis points Y/Y), accommodations (85 basis points M/M, 245 basis points Y/Y), education (29 basis points M/M, 74 basis points Y/Y), healthcare (40 basis points M/M, 92 basis points Y/Y) and professional services (24 basis points M/M, 105 basis points Y/Y) all recording their largest-ever monthly increases.

Despite a reduction in the June SBDI, financial stress remains high on Main Street. The Paycheck Protection Program was a stopgap to keep small businesses afloat, but a recent NFIB survey showed that 71% of recipients have exhausted their PPP funds. Meanwhile, half of small business owners are having difficulty making mortgage, rent or lease payments due to declining revenues. A mid-July Goldman Sachs report found revenues are down at least 25% from pre-COVID-19 levels for nearly two-thirds of small businesses, a problem that could be exacerbated by the lapse or reduction in enhanced unemployment benefits. While a reduction in benefits could lead to increased hiring (particularly if paired with a one-time “return to work” financial incentive), for the quarter of small business owners who expect to be out of business by the end of the year given current conditions, the reduced spending that will accompany a reduction in benefits will be far more consequential. It is not yet clear what additional assistance will be provided. Proposals such as a $60 billion long-term loan initiative and additional PPP assistance targeted at the hardest-hit businesses would likely help, but the fate of small businesses in the months remains shrouded in uncertainty and will hinge on how policymakers respond to both the public health and economic crises.