How Risky Are Healthy Small Businesses?

Have healthy small businesses been unfairly denied access to credit?

A new study from credit bureau Experian suggests that companies that were in good financial shape two years ago are much less risky than the average small business. Experian tracked 300,000 U.S. companies with fewer than 25 employees and less than $10 million in revenue over two years, from April 2007 to April 2009. They looked at how often these businesses suffered a “negative event,” meaning a bankruptcy, collections action, judgment, tax lien, or going more than 90 days delinquent on a payment.

Predictably, all of these rose significantly since 2007 — which means lending to small businesses is riskier than it was two years ago. Banks have been raising credit standards accordingly for small business borrowers.

But here’s the interesting nugget in Experian’s report: businesses that were “clean” in April 2007 — which had no severe delinquencies, collections action, tax liens, etc. — posed far less risk than the general small business population over the following two years. The sample of healthy businesses were half as likely to become severely delinquent on a payment:

Experian’s point is that despite the turmoil in the economy, businesses that were healthy before the recession have remained relatively good credit risks.

From the report:

Due to the number of creditworthy businesses, the apparent opportunity in the market and the success of risk assessment tools in predicting future delinquent payment behavior, the study suggests that credit for small businesses should be more accessible than it has been.

The disturbing pattern we’ve seen since the financial crisis is that banks will curtail credit en masse not in response to borrowers’ risk but in response to unrelated problems on the banks’ balance sheets. Struggling companies shouldn’t expect lenders to take a risk on them right now, but when sound businesses with good credit ratings and track records of repayment can’t access reasonably priced credit, I have to think that will slow the recovery. We need more data than we have here to definitively show that’s what’s going on. But the anecdotal evidence is pretty convincing.

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