The Near-Future of Small Business
How Experian and Moody's are tracking and predicting the health of the small business sector.
I recently had the opportunity to sit down with Joel Pruis on our Lendio Business Fuel Show. Joel is a senior business consultant for Experian, and we discussed the quarterly Experian & Moody’s Business Credit Health Index. It shows how well the business sector is doing, and where it’s going in the future. You can watch the video or read the transcript below.
ERIK LARSON: Hi there. Welcome to Lendio Business Fuel. I’m Erik Larson. And today, we’re talking about the health of the small business sector. We have Joel Pruis of Experian here to talk about the Experian and Moody’s small business credit index. Joel, thanks for coming on the show.
JOEL PRUIS: Thank you Erik. Appreciate the opportunity.
ERIK LARSON: Joel, can you tell us a little bit about yourself and what it is you do to Experian?
JOEL PRUIS: Sure. I’m a senior business consultant with Experian and part of our global consulting practice and I’ve been doing that for about 12 years. And then prior to that, I was with several banks as a commercial lender and a small business lender for 15 years before that. And I work with our clients delivering best practices around small business credit on origination portfolio management as well as the use of Experian data to support those.
ERIK LARSON: Fantastic. Great. Could you tell us a little bit about what Experian does?
JOEL PRUIS: Sure. So, Experian is predominantly a data company and you may know us from our consumer credit reports. If you’ve seen the TV commercials freecreditreport.com, that’s Experian. And so, we have the consumer data, we also have then the small business sort of the commercial credit data as well, and then we provide the analytics and the consulting software platforms to help our clients leverage that data and their regular decisions that they make on daily basis.
ERIK LARSON: All right, awesome. All right. So say, we’re talking about the Experian Moody’s Index. Now, I have some questions about that. When exactly did this start? And, what exactly does it tell us?
JOEL PRUIS: Yes, it started a little over 2 years ago. And, the purpose behind the index is to measure the health of the small business segment in the United States. And so, you know, what are the economic conditions, how well are they performing, and then how well are they actually meeting their obligations on a regular basis? And so, we measure those that have a 100 or fewer employees, we take the Experian business credit data, combine them that with Moody’s Analytics macroeconomic data, put that together to then produce this index. And of late, it’s been doing very well. We’re seeing real strong recovery for the small business segment in the United States.
ERIK LARSON: Wow, that’s great. Yeah. So, you’re basically taking small business credit and aligning it with macroeconomic data. And then you can kind of tell, all right, is this business will be able to credit later or all these businesses which kind of shows what’s the future of small business is. Is it the more access to capital small businesses have, the better off they can do?
JOEL PRUIS: Exaclty. Exactly. So yeah, as you’re looking at, you know, how well they’re paying in the past which is, you know, one of those areas that’s a big factor on how well a business is going to be able to have access to the capital that they need. Plus, looking at the macroeconomic factors to paint the picture of what is going to be the future looking like for those small businesses that operate and succeed, you know. And what we’ve been seeing is that, you know, obviously, some regional variations on how well the business has performed as well as the economic factors that are supporting that. But, overall, we’re seeing significant improvement in that small business sector. More access to credit, faster payment on those obligations that they have, and greater use of credit overall.
ERIK LARSON: Okay. So, you’re saying, in the latest quarters report which is quarter 3 going to quarter 4, we obviously got small businesses doing better, they’re making their payments on time which means there’s more access to capital. Of course, you said this differentiates from sector to sector. Are there any sectors out there that are a little worried might not be doing great as they should?
JOEL PRUIS: Yeah. So, what we’re seeing is – they were seeing that the West region and the Northeast region are really – those are the two that are really picking up. The West has been doing very well for the last couple of years. The Northeast is picking up and doing better as it relates to the European economy, actually, driving more need for manufacturing in the Northeast. It’s the Midwest and the South that are really trailing behind, those two sectors. So, with the Midwest actually, has been falling into 4th place of the regions. And then the South, really started – starting to see some comeback but, you know, when you look at those two regions, the Midwest and the South, it’s really predominantly – Midwest is being dragged down by, you know, Illinois; and the South has being dragged down by Florida. And with those two, really kind of bringing those two set, of those two regions down as far as the overall performance.
ERIK LARSON: All right. So, any idea, like any theories you have on why Illinois and Florida are the ones dragging the rest down? Is there any – I mean, thoughts on that?
JOEL PRUIS: Florida is really being – it’s kind of the anchor of Florida, the South as it relates to the housing market. So they have a lot of homes in the market, the construction industry is lagging as far as its capabilities to kind of, you know, recover in the State of Florida. And so as they’re going through that housing inventory, once they do, then things, you know, should start to pick up a bit. We got Illinois with the problems that they’re having at Chicago, some issues on their pension. While their housing markets’ doing a little bit better, there’s just still some of those macroeconomic factors in Chicago, in the State of Illinois there which is dragging that down and preventing them from really taking off and doing much better.
ERIK LARSON: Yeah. So, we’ve seen that Florida is still suffering from the housing colla- – the whole economic boom still hasn’t collapsed in 2008. And then Chicago, they’re – now you’re talking about the pension situation happening there. But also, there’s some macroeconomic factors that are kind of dragging them a little bit down.
JOEL PRUIS: Correct. Great. Now —
ERIK LARSON: Okay.
JOEL PRUIS: Also, you see, the result that we’re seeing there, if you, you know, we have a rank order, the MSA’s across the country. And, what we’re seeing is consistent on the quarterly basis that Florida now, some major pot in Florida are consistently in about 10 of the – those MSA’s in the country. So, sort of business performance to a business pain performance, so, as far as the delinquency and the days we got in terms. Whereas, seeing some, you know, in the Midwest, you know, some of those aren’t as prevalent as far as some of the course performance just more of the overall access to credit. Yeah, still some delinquency percentage that we’re seeing.
ERIK LARSON: All right. So you also mentioned that Northeast is doing really well because of Europe. Could you elaborate that just a little bit more?
JOEL PRUIS: Yeah. So, you can even think back to 2009 where the economy is starting recovery. The Northeast was actually doing fairly well at that time, and it was more of the demand that they were seeing from Europe for the products being manufactured in the Northeast. And so that gave them the pickup in 2009. It repeated itself this year and we’re starting to see the pull up of the economy of the Northeast. So where we see the West to be more impacted by, you know, Asia, Japan and that side. Northeast is being more affected by the European markets.
ERIK LARSON: Well, that’s some great stuff. Thanks for filling us in on that index. Now, that index comes through four times a year, correct?
JOEL PRUIS: Yeah, that’s correct. Yeah. Normally about, you know, give it about 6 weeks post quarter end. And, we compile our data and bring it in with Moody’s macroeconomic data. And, we provide it in a paper form so – and we’ll email it out and as well, we do a quarterly webinar that people kind of tend to get a little bit more insights into what the findings were in small business credit index.
ERIK LARSON: Great. I will get you some links below. You guys can go and check out more about the experianmoodyscreditindex and get some idea yourself. All right. So in conclusion, every time someone comes on this show, I ask them two questions. First question is, what are some of the biggest mistakes you’ve seen in small business owners make?
JOEL PRUIS: So coming from the Lendio perspective, a couple of mistakes that I typically see is that, one is really the management of the cash flow. And while you may get the, you know, the type of financing that allows you to purchase equipment. If you get in the shape of a line of credit, and you know, the line of credit that requires interest-only payments to be made. What happens is that you find yourself 2 years later, you’ve made all the interest-only payments, which you haven’t paid down on the principal at all. And that is similar to someone buying a car and making interest-only payments. And then find yourself 2 years down the road, and the old, you know, $30,000 on the car is now worth $18,000. So it is really the discipline around the type of financing that you accessing to afford your business. And secondly, is with the – that they are unaware that they are actually building a business credit profile. And that how they are paying, even the trade payables, like the account that they make at Stables or at Home Depot or something, that how they pay those bills reflects on, you know, how well their company is going to be able to meet its obligations and that impacts their ability to actually gain, you know, access credit in the future should they need it at that time.
ERIK LARSON: All right, great. That’s great advice. Also, second question, what’s the best advice that you could give to a small business owner?
JOEL PRUIS: Oh man. Well, a couple of things, perseverance. It is a tough road. And when I was a lender, I used to see people are coming to my office and they say they want to start up a business. I’d ask why do you want to start up a business? And they say, “Well, I want to be my own boss. I want to be able to take vacation whenever I want.” That’s not going to happen. Your business will own you for years to come and you’re going to put your heart and soul into that business. So just be prepared for that and be prepared for having to do whatever to get through. The second is watch that cash flow and make sure that as you are paying your bills the prioritization of that, as well as meeting your obligations. Doing those two things, I think will be a big help in your business.
ERIK LARSON: All right. Thanks Joel. Joel, thanks for coming on the show. And everybody, we’ll see you next week on Lendio Business Fuel.
JOEL PRUIS: Thank you sir.