Small Business Borrowing Makes Big Month-By-Month Jump: PayNet

CHICAGO (Ann Saphir) - Borrowing by small U.S. businesses jumped in August, a bright spot in an economy whose weaknesses are so pronounced that the Federal Reserve last month launched a new program aimed at encouraging just such borrowing.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, gained 19 percent in August from a year earlier, and 8.6 percent from July, PayNet said on Monday.

It is at its highest since April 2008, after gaining by double digits every month for 13 months.

Borrowing by small businesses is seen as a harbinger for the broader economy because they account for the lion's share of new hiring. Two years into a recovery from the worst recession in decades, the United States is still dogged by 9.1 percent unemployment, and in August, U.S. employers overall added no jobs.

The latest surge in borrowing suggests the jobs picture will brighten in coming months, said PayNet founder Bill Phelan in an interview.

"Any time you put in new plants and equipment, you've got to have people who sit in front of them - we will see some job growth," Phelan said.

PayNet tracks borrowing by millions of small U.S. businesses, which cut back dramatically on borrowing in 2008 and 2009. Now they are back to borrowing again, on a scale that points to real optimism about demand for products rather than simply the need to replace outdated machines, Phelan said.

"These are 'show-me' people -- they won't do things on a hope and a prayer," he said.

The loans PayNet tracks are typically used to buy or update plants and equipment, and on average are for four-year projects.

Economic news has been so dismal since the summer slowdown that the Fed after its September 20-21 policy meeting declared there were "significant" downside risks. The central bank plans to start a new $400 billion stimulus program to push down long-term interest rates on October 12.

Amid the weak economic reports, including one Friday that showed income in August slipped for the first time in two years, there have been a few other signs of strength, including a decline in jobless claims last week and a stronger-than-expected showing by U.S. Midwest manufacturers in September.

Separate data from PayNet showed small business health was improving, as loan delinquencies continued to abate.

Accounts in moderate delinquency, or those behind by 30 days or more, fell in August to 1.64 percent from 1.76 percent in July, PayNet said.

Accounts 90 days or more behind in payment, or in severe delinquency, fell to 0.44 percent in August from 0.51 percent in July.

Accounts behind 180 days or more, or in default and unlikely to ever get paid, fell to 0.68 percent of total receivables in August, from 0.70 percent in July, according to PayNet, which provides risk-management tools to the commercial lending industry.

The Thomson Reuters/PayNet small business lending index is correlated to developments in the overall economy, with changes in the index preceding changes in the overall U.S. economy by two to five months.

PayNet collects real-time loan information, such as originations and delinquencies, from more than 250 leading U.S. capital equipment lenders.

(More on Thomson Reuters/PayNet Small Business Lending Index is available here)

(Reporting by Ann Saphir, Editing by Chizu Nomiyama)

Copyright 2011 Thomson Reuters. Click for Restrictions.