@Risk

There’s no doubt that small businesses everywhere are feeling squeezed by the credit crisis. But, are some small businesses emerging as more creditworthy than others? If so, how can you make that distinction? At this point in the economic downturn, are there any indicators that can help predict which companies may be better credit risks?

Experian, a global information services company, delved into questions like these and recently released the results in a fascinating Market Insight Snapshot titled “Understanding the state of small-business risk.”

Experian tracked more than 300,000 small businesses in the U.S. from April 2007 to April 2009. Their analysis examined the rate of new derogatory events (meaning incidence of a new lien, judgment, collection, bankruptcy or severe payment delinquency) and uncovered several intriguing emergent trends.

Not surprisingly, all five of the key measures of risk showed a consistent, increasing trend over the two-year study period. Here are a few of the sobering details:

• From 2007 to 2009, new bankruptcy filings increased more than ten-fold.
• Over that same time span, judgments climbed a whopping 370%, while collections filings increased 320%.
• The rate of severe delinquency (91-plus days late) was nearly 300% higher in 2009 than in 2007.

However –and here’s where things get really interesting –Experian also found that “clean” businesses fared dramatically better than the overall small-business population in every risk category.

The study defines a “clean” business as one with no derogatory events prior to April 2007.

Now, that’s not to say that the clean business group was completely immune to negative events over the past two years. In fact, the report shows that 11% of clean businesses had a derogatory event between April 2007 and April 2009.

The point is, though, that the rate of incidence among clean businesses was less than half of that of the general small business population.

So, according to this new data, it appears that most businesses that were healthy before the economic downturn remain relatively good credit risks.

Maybe it’s time for banks and others to put good risk management practices to work and reassess access to reasonably priced credit for healthy small businesses?

As the authors of the Experian report conclude:

“Caution is warranted, but, depending on one’s appetite for risk, there are tools and practices in place to accurately gauge that risk and better identify businesses that fit within a given lender’s/credit manager’s business strategy.”

I encourage you to check out all the details in the five-page report available here.