Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- Equifax logged a decline of 4.3% in its Small Business Lending Index for February 2025 as well as a year-over-year drop of 10.2%, reflecting a further decline in credit action.
- The number of 31-to-90-day delinquency records decreased, but delinquencies for more than 90 days were on the rise, reflecting irregular payment behavior.
- The Small Business Default Index had high readings year-over-year despite its modest monthly decline.
Small business owners were under pressure in February as lending tightened for the second consecutive month. The Equifax Small Business Lending Index fell by 4.3% in February, which was a signal of lender caution.
The real story is about repayment outcomes rather than new loans. The February delinquencies for accounts in the 31-to-90-day bucket reflected a marginal improvement. Accounts between 91 and 180 days delinquent showed a marginal increase.
The Equifax Small Business Default Index fell five basis points to a reading of 3.37% as it improved slightly but remained higher than the previous year.
The news is both positive and negative for financial institutions that engage in subprime lending. The decline in originations will drive alternative credit demand. But high delinquency risk requires disciplined underwriting procedures.
The February Equifax release reported a further decline in small business loan originations. The year-over-year decline of 10.2% reflects lenders retreating from risky segments. The construction industry and the retail sector posted the largest originations decreases, since cyclical sectors experience additional challenges in obtaining funding.
Lending to small businesses has decreased. That does not necessarily imply lenders abandoned these firms, however. Credit models for lenders are sometimes optimized during bad times until lending resumes under more favorable circumstances. The capital access challenges of current business owners create a feeling of financial insecurity.
Mixed Signals for Delinquencies
Delinquency figures from Equifax present mixed signals regarding business payment performance. The delinquency rate for 31 to 90 days improved at a small rate, dropping by 5 basis points to 1.73%. Certain companies exhibit good payment behavior by settling their short-term obligations on time.
While 31-to-90-day delinquencies are down, 91-to-180-day delinquencies have risen, indicating ongoing cash flow concerns.
The number of 91-to-180-day delinquencies rose by 1 basis point to 0.69%, reflecting ongoing cash flow concerns. Subprime specialists can use the trends to shape their product strategies and formulate plans for minimizing potential risks ahead.
Defaults Remain High Even with Monthly Drop
The Small Business Default Index (SBDFI) recorded a slight decline from January’s reading but continues its year-over-year growth of 37 basis points, which reflects ongoing concerns. Lenders and analysts must see several months of declining defaults before a positive trend can be announced.
Defaults usually trail behind other measures, so February figures reflect lending from several months earlier. Future reports will likely register increasing defaults if the lending trend continues.
Small business credit remains on a tightening path, but the present scenario is not one of total gloom. Subprime lenders may see the February data as a reaffirmation of their pragmatic strategy of flexible lending terms with innovative solutions to meet unmet corporate requirements. The evolving economic environment calls for flexibility.
