In its latest quarterly credit outlook, PayNet noted that the small business sector closed Q1/18 with a healthy increase in investment and relatively moderate risk. As a result, the business cycle looks healthy from a risk-reward standpoint, and expansion at the low-risk phase of the business cycle is alive and well.

“Notable in Q1 is the pace of expansion – neither too fast nor too slow,” said William Phelan, PayNet president. “After years of low risk low growth, we are seeing a decided change towards higher growth coupled with higher credit risk. How high and far this expansion, propelled by Main Street, will last remains to be seen, but we are sure that a return to more normal and higher levels of credit risk will follow.”

On a monthly basis, the Thomson Reuters/PayNet Small Business Lending Index (SBLI) decreased slightly from 144.5 in February to 143.9 in March. Compared to the same month one year ago, the index is up 8%, representing the sixth continuous month of increases. The expansion phase of the business cycle gained momentum in Q1/18, with investment exceeding 140 for the first time. Risk remained relatively modest, with loans severely past due increasing just 12 basis points to 0.37% from their low point of 0.25% in 2015.

Results show solid investment support from several sectors in March, with year-over-year increases in mining (13.4%), transportation (9.9%) and construction (6.9%). Weaknesses are primarily in the services sector with declines from March 2017 in information services (-11.1%), accommodation and food services (-5.2%), and professional services (-2.3%). Regionally, expansion is becoming more broad-based, with eight of the 10 largest states experiencing material growth compared with March 2017. North Carolina (12.8%), Texas (10.8%) and Ohio (8.5%) led the largest 10 states. California (-0.2%) was the only one of the 10 that declined. The quarter-to-quarter change for the U.S. overall was 1%.

The Thomson Reuters/PayNet Small Business Delinquency Index (SBDI) 31-90 days past due increased three bps from 1.41% in February 2018 to 1.44% in March 2018, marking its highest level since April 2012. Compared to one year ago, delinquency increased by 10 bps (8%).

Default rates remained flat month-over-month with the PayNet Small Business Default Index (SBDFI) at 1.84% for March 2018. Compared to a year ago, the index is down four basis points. Information services defaults rose swiftly (+19 bps) since February 2018. Conversely, default rates continue to fall rapidly in the transportation (-19 bps) and mining, oil and gas (-14bps) sectors compared with February 2018, as both industries continue to benefit from turnarounds in economic conditions in their respective industries.

“A clear shift to risk-taking is underway for Main Street,” Phelan said. “Main Street businesses have shifted out of lack-luster growth to record levels of investment.”