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How Risky Are Healthy Small Businesses?

Posted by: John Tozzi on August 03, 2009

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.

Reader Comments

Laura Walker

August 4, 2009 06:06 PM

Banks are not the only source of commercial credit. Why are we depending upon the acquisition of more debt to begin economic recovery? Excessive borrowing and over-lending got us in this mess to begin with, so why not look for debt-free alternatives to bank loans? As shown in this article, even those businesses with good credit are being passed over as risky because all businesses are at risk during a recession.

Not many business owners are familiar with the common method of obtaining working capital called invoice factoring. It is much easier to get than traditional loans because the focus is not your credit, but your customer's credit worthiness. A factor company advances cash against the asset of B2B receivables, therefore not creating a new debt. The factoring industry is definitely not turning up its nose to small businesses.

If you want to know more, please visit


August 4, 2009 09:21 PM

Factoring is good if your business is b2b. If you are a retailer with a good track record the chances of getting a reasonable loan is quite small if you do not own property to lean on. On top of that the cc industry continues to lower credit limits. as this happens the limits are lowered to current balances which makes it look like you are over extended which leads to a higher cost of money and even less available. Where does it stop?

Richard Eitelberg

August 18, 2009 11:40 AM

A convenient way for many of the troubled businesses your article describes, to circumvent their obstacles and get some breathing room is through using "purchase order financing" and "letters of credit" to finance deals. When I was a chief financial officer (at two different manufacturers), I used "PF" and "LC" to relieve some pressure on my employer's cash flow and working capital conditions.

"PF" and "LC" are more expensive than other financing formats, because this is only "transactional" and "temporary". This financing only covers the specific merchandise, inventory, and goods being manufactured and shipped, from the time those items are produced, finished, ready to be shipped, and the point at which delivery is made. At that time, the "PF"/"LC" firm gets taken out. Typically, this time frame is a month to six months. It is worth investigating for small businesses that have been cut off or curtailed by their regular lenders. It enables these business owners to follow through with profitable deals that perhaps they could not otherwise transact.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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