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Credit Crisis Roundtable - Data on Small Business Credit Shows "The Old Rules Don't Apply"
CT: Dan, you've developed some interesting small business data at Experian. What can you tell us about that?
Dan Meder
Vice President, Business Information Services, Experian
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Dan Meder, Experian: Yes, we just released our study on how personal and business credit interact this in October.
Knowing from previous studies that small business owners' personal and business financing are often closely intertwined, we wanted to see what the impact of the mortgage crisis would be on the financing of their small businesses. We came out with some pretty interesting observations that seemed counterintuitive, but if you really think about them, they probably weren't.
Experian Finding: Business Credit More Important Than Personal Credit For Small Businesses
The first trend we found was that small business owners are allowing their personal credit to suffer while keeping their commercial credit intact.
Some points were made earlier about people being so upside down in their homes that they are just walking away. In fact, Bob (Carbonell, of Bernard Sands), you just said that before me.
They are figuring, "Okay, we got ourselves in way over our heads, our business is a source of our cash flow, of our way of earning a living. So we need to keep that clean. We are going to die on the personal side anyway probably, so let's just focus on the business."
That is one of the things that came through loud and clear for us. The other thing that came through loud and clear is that a lot of businesses use personal financing sources for their small businesses. We saw a huge shift over financing on the commercial side from the personal side.
The next chart shows small business owners whose mortgages have gone recently delinquent.
If you look at the industries there, it is probably no surprise that they are transportation, construction, retail trade, financial, insurance, and real estate.
| Industries most impacted by the housing crisis | | Experian Data |
| SIC |
% Newly delinquent |
% Difference from avg |
| Transportation, utilities |
3.78% |
39.94% |
| Construction |
3.51% |
30.02% |
| Retail trade |
3.15% |
16.67% |
| Financial, insurance,real estate |
2.94% |
8.88% |
| Wholesale trade |
2.58% |
-4.45% |
| Manufacturing |
2.46% |
-9.05% |
| Services |
2.35% |
-13.03% |
| Agriculture, forest, fishing |
2.11% |
-21.80% |
| Mining |
2.09% |
-22.62% |
| Public administration |
2.05% |
-24.12% |
| Overall |
2.70% |
0.00% |
I thought it was very appropriate to have the end of Chris's (Hobson, from Cortera) presentation just before this one because they flowed in very nicely. Dave, I don't know if that was part of the plan, or if it just sort of happened.
CT: Serendipity!
Meder: Chris's last slide made a comment about triple whammies. If you take a look at those industries where small business owners are hardest hit, certainly there were double and triple whammies for each one of them.
Transportation and utilities certainly were getting hit by the energy issues. Construction is very well documented. Retail trade is being hit by the drop in consumer spending, and the real estate business, again, very well documented.
Those with the lowest levels of recent delinquency are in government jobs, which is probably not a big surprise.
Other categories that are doing a bit better than average, with lower than average mortgage delinquencies, are those in the wholesale trade and manufacturing. We hypothesized that this was because of the strength of the export trade. (As the dollar went down earlier this year, U.S. goods became more attractive to foreign buyers.)
My wife works for a small exporter that was actually doing quite well. They sold electronic parts to the Indian government and did very, very well there.
That does seem to be the cause and effect there, and I don't know if anyone has a different view on that.
Chris Hobson, Cortera: The only other thought would be, Dan, that it is the timing effect, right? Consumers going more delinquent pulling back on their spending. It flows through to retail and then on to distribution and manufacturing.
If you rerun this in six months you may find that the python is swallowing the pig, and right now the pig is at the front of the python. It is going to get to the back at some point.
Meder: Good point. Next, we looked at small business owners going delinquent by region. Again, no surprise here. It fits right along with the areas that had the highest increase in home values and obviously the most precipitous drops in home values.
| Business regions most impacted by housing crisis | | Experian Data |
| Geographic region |
% newly delinquent |
% difference from avg |
| NV |
5.37% |
95.37% |
| FL |
4.40% |
60.06% |
| CA |
3.48% |
26.75% |
| AZ |
2.77% |
0.94% |
| Midatlantic |
2.34% |
-14.91% |
| Midwest |
2.78% |
1.14% |
| Northeast |
2.09% |
-23.82% |
| Northwest |
1.74% |
-36.82% |
| Southeast |
2.74% |
-0.44% |
| Southwest |
2.69% |
-2.05% |
| West |
1.50% |
-45.26% |
If you look at Las Vegas, Tampa, Miami, San Diego, Los Angeles, San Francisco, and Phoenix, the Case-Shiller Index has those as the top seven cities with the largest drop. It just fits right here and it bolsters that thought that a lot of folks are just upside down in their mortgages and are just walking away, even business owners.
You would think that small business owners would be a little bit smarter than the average consumer. But they performed only slightly better than average in terms of mortgage delinquency, which is kind of surprising.
The other thing that is interesting is we thought the age and size of small businesses would be an important predictor of strength, but they weren't. Established small businesses also got caught up in this whole euphoria of having bigger and better, and then went beyond their means.
Next up is the real meat of our findings. This is where we started to see the difference in the way that the consumer and commercial debt obligations are being met.
The way you read the next chart is to note that the middle bar represents the dae that a small business owner has his first late mortgage payment. We've tracked four quarters of overall debt delinquencies before the mortgage delinquency and four quarters after it.
Experian Study: Business owners pay business obligations before personal obligations
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As you can see, there is a fairly rapid step up delinquent debt on the consumer side from roughly 17% to just north of 50% when the mortgage delinquency occurred, and then peaking at 62% of their total consumer debt outstanding within two quarters after that.
But if you take a look at the way small businesses are handling their commercial obligations, they're not rising by nearly as much. They only went from about 3 and a half percent delinquent to just about seven and a half percent.
Percentage wise, it just wasn't that high. They absorbed all of the cash flow issues on the personal side while they kept the business side going pretty strong.
If you move on to the next, and this Chris, I think follows along very nicely with your slide about how the trade guys are being asked to foot most of the bill.
Again, knowing that a lot of small businesses use personal financing to fund the business, if you look at the shift in balance prior to the mortgage delinquency and then after, you can see that the consumer obligations actually drop by 50%.
This is a ratcheting back of availability on the consumer side, but it also is a 50% growth on the commercial side. This is all, by the way, trade credit financing. This is not bank financing. This is all trade credit.
To John's (LaRocca, of CreditPointe) point of before, I think that notion of the trade credit folks being asked to be the bank is already happening. Our data really supports that.
I presented at the NACM earlier this year, and it was a very, very lively conversation. There were a lot of folks who served the construction industry in the audience and they were very angry with the banks, actually.
I mean very angry, with comments like "These guys (banks) created this problem, and now it is our mess to clean up. I've got to keep these guys afloat because if they go away, then my business is going to suffer," and that whole thing.
 I think that notion of the trade credit folks being asked to be the bank is already happening. Our data really supports that. 
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-- Dan Meder, Experian
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Even in May, we were starting to see a lot of that happening already. When we saw these results, they just fit with the whole thing. It also kind of makes you wonder if maybe there isn't a bubble developing on the commercial side as well, that maybe it just hasn't hit yet because we aren't seeing the rapid increase in delinquencies that you would think we would see, but maybe it is just a matter of the time stretching out.
In terms of hard numbers, by the way, the average trade balance in this study was about $6000, and it grew to $9000, so that is where you get that 50% increase from.
We presented these studies quite a bit during a seminar road show earlier this year. One of the points we were making back to everyone is that you know, a lot of this stuff, because it is small dollars, may be growing unseen in your portfolio, and that you really need to take a look, and you really need to see what is going on regardless of whether you use outside information or not.
You really need to take a look and see because a lot of it could be flying under the radar, and it could be a lot of stuff that is going to accumulate and potentially create an issue for you.
We also looked at payment patterns before and after the mortgage delinquency. Sixty percent of the time there was no change, and 12% of the time they would pay slow before and after.
So for 72% of small business owners, there was no difference in payment pattern before and after the mortgage delinquency; however, in 13% of the cases, they actually paid faster after the delinquency.
It could very well be that they got out from under a big debt load.
CT: So your data is interesting in that it shows they may let their home go before their business.
Meder: It kind of goes back to the original point, the sort of counterintuitive thing that we saw. We all thought they would protect the home no matter what, but there is no point if the house is worth less than the amount of the mortgage. It is going to catch up to you eventually, and it is killing your cash flow.
More and more small business owners are just bailing out. A smaller monthly amount is needed to live, and it is hard to get employment, so you have to keep your business going. A lot of people who are used to being their own boss don't want to do that anyway.
It is sort of the reverse of what we saw before where the consumer financing was propping up the business. How much of commercial financing is now propping up the personal side?
Again, Jerry (Flum, of CreditRiskMonitor), to your point, some of the rules that existed before, the opposite is true now.
This next slide (below) is just something that we do as a natural course at Experian. Because we have both consumer and business information, we know have a lot of data on micro, or small businesses. Consumer scores are used to check those businesses.
Part of it is cost, and part of it is just the fact that we often have more data on the individual as an owner than there on the business. So we took a look at the predictive power (the "bad capture") of the consumer scores for these bad businesses, and compared that to the predictive power when we bring the two sources of data together.
Experian Data: Combined Consumer & Business Data Better Predictors
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As you can see, at the bottom 50% with the blended data, we had slightly more than 86% bad capture (predictive power) whereas with only a consumer score, it was just about 70%. The business data actually did give a more targeted assessment in this environment.
Especially at a time when you see the consumer and business financing going this way, just to rely on your consumer scores is probably not the best way to go.
CT: Thanks very much, Dan.
Next we'll turn our panel over to Bob Carbonell of Bernard Sands. Bob is one of the nation's foremost retail experts, with 40 years in credit reporting. Bob, ...
Editor's Note: This is part 6 in our 12 part series.
Next up in part 7:
40-year credit reporting veteran expects "the toughest 60 days of my career!" ... Proprietorships walking away from businesses... California's stats were worse than the rest... deal order-to-order with all but the top dozen or so companies... after Christmas, "all bets off?" ... 20% (or more) of all car dealers to go under? GM withholding dealer rebates to save cash?
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