(By Lynn Adler - Reuters) - Small businesses re-engineered themselves during the recession and are now more confident and profitable, with lower-risk loan profiles, and are increasingly spending for expansion, PayNet President William Phelan said on Monday.
Borrowing is up for new investment by small businesses, which have consolidated, incorporated technology to boost efficiency and outsourced while often keeping hiring dormant, Phelan said at the 2011 Reuters Manufacturing and Transportation Summit.
"What we've been undergoing is a new economic order," he said. "The economy is adaptable, and it's adapted to the new reality."
The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small businesses, jumped 20 percent in October. It was the 15th month of double-digit growth.
"There's underlying strength in the U.S. economy that's not being reported by stock market indices," said Phelan. "Profits drive confidence, and we're not seeing that profitability reported anywhere because these are privately owned companies."
U.S. gross domestic product will likely be stronger over the next two to five months, based on the small business lending growth, PayNet said.
Small business is in better fiscal shape then in 2005, prior to the recession, with considerable improvement in risk profile.
"There are millions of small businesses, their financial capacity has improved vastly since 2009," Phelan said.
About 7 percent of small businesses in the United States "went under" in 2009, and that default measure will be closer to 3 percent at the end of 2012.
"We've seen delinquencies improve consistently to levels that are now below risk from 2005, so that lends confidence in my mind that we've got these millions of companies in the United States that now have financial capacity that didn't exist three years ago," he added.
Banks are "hungrily looking for earning assets" and small business offer an opportunity to diversify their loan portfolios, Phelan said.
Agriculture, manufacturing and construction are gaining traction, and equipment producers for these industries are benefitting from the new investment, he said.
New truck production is above pre-recession levels, with the growth rate up to 21 percent in the most recent quarter from 15 percent the prior quarter, according to PayNet.
In one example of ongoing consolidation -- a "systemic trend" -- there are 19 percent fewer grocery store start-ups in 2010 from the prior, as many Mom and Pop stores have given way to Costco and other major retail business now in that business.
Businesses that are borrowing now are essentially making a four-year bet, and would not be making that gamble without certain signs of consumer demand, Phelan said.
At the same time, the cost of doing business has escalated, and the industry is closely watching federal tax policy and other regulatory changes that could halt momentum.
"Right when they are starting to get their sea legs, you wouldn't want to have another wave hit the boat," Phelan said.
PayNet, based in Chicago, provides risk management tools to the commercial credit industry. Its data reflects commercial loans and leases on more than 19 million contracts worth about $900 billion.
(For summit blog: blogs.reuters.com/summits/)
(Reporting by Lynn Adler; Editing by Richard Chang)