Small business borrowing is one of the metrics used by economists to measure the strength of an economic recovery and if October’s number is any indication, the recovery is proceeding at a blistering pace.
For the third straight month small business borrowing saw a double digit increase. For those who study economic indicators, they know that any time a double digit move in either direction is seen, that is cause for a second look. Small business borrowing saw an increase of 19% from the previous year. (November hasn’t been released)
An increase in the amount of small business borrowing is important because it shows expansion. These loans aren’t used as a way to start new businesses. Instead, they are used to expand. Items like adding new equipment, new manufacturing space, and additional locations are common uses for small business loans.
Not only is this good news for the health of small businesses but according to PayNet, the author of the study, this bodes well for the nation’s unemployment rate, currently at 9.8%. When small businesses add equipment or space, they need additional employees to operate the machinery. Businesses know this and they factor the cost of new employees in to their large equipment purchases.
Some argue that rises in small business borrowing are artificial due to the massive amount of economic stimulus introduced by the Federal Reserve. Not only is money being pumped in to the economy directly, the Fed also keeps interest rates low which encourages banks to lend at extraordinarily low rates. These two actions cause the economy to appear artificially small business friendly, according to critics.
Proponents of such actions believe that just as crutches allow an injured leg to heal by removing some of the pressure, so does economic stimulus. Even with these actions, the economy is still improving and for that reason, metrics such as small business borrowing should be considered a real indicator of economic recovery.
Regardless of the political debate, individual small businesses, widely known for hiring the bulk of United States workers, show improving health in other areas as well. Accounts behind by 30 days or more fell in October to 2.65% from 2.69% in September. Accounts 90 or more days behind fell to .74%, down from .79%, and accounts more than 180 days delinquent, known as accounts in default, fell to .82% from .83%.
Does this mean that the economic environment is becoming more friendly to those wishing to start a new business? Yes, according to Thomson Reuters. Because interest rates are at levels unseen in decades and the Bush Tax Cuts appear to be slated for extension, those who wish to open a small business are experiencing an improving environment where opening the doors to the American dream are once again, possible.