Business Credit Line Utilization Is Up As rates stay high, concerns about credit risk and borrower health are top of mind for bank and credit union leaders, especially as it relates to lending to small businesses. In conversations with community banks and credit unions across the country, we’re hearing about a significant increase in line utilization, raising questions about both liquidity and credit risk. However, recent data from Abrigo shows that privately held companies across the U.S. are displaying their financial resilience. They’re borrowing more, but they’re also managing their leverage and meeting debt obligations — even as they feel the pressure of high rates. For financial institution leaders and their lenders, this data would indicate that there are opportunities to grow the small business loan portfolio in a safe and sound manner, particularly with rates apparently peaking. A recent U.S. bank survey of 1,000 small businesses found strong optimism about the future among owners. Abrigo’s proprietary analysis comes from the largest real-time database of private-company financial statement information in the United States. Thousands of banks, credit unions and accounting firms use our risk management and lending solutions, contributing to this cooperative data model for banking intelligence. Nearly all U.S. businesses are privately held, and most are small, so the unique, aggregated view into how these private firms perform provides leadership teams with insight to make informed decisions about the large and growing small business market. Steady Debt Service Coverage Despite Rising Rates The debt service coverage ratio (DSCR) is a fundamental measure of cash flow strength. The latest data from Abrigo shows that even with a 350-basis-point increase in interest rates, the average DSCR for privately held businesses was 5.75x in 2023, nearly unchanged from 5.73x in 2019. Businesses are feeling the pinch but handling it well, with enough cash coming into service debt as contractually agreed. Improved Leverage Ratios Many businesses have taken a more cautious approach to borrowing in the rising-rate environment. Abrigo’s data shows that the debt-to-equity ratio has decreased from 4.10x to 3.45x. Despite increased utilization, the reduction in leverage indicates that companies are prioritizing financial stability. Leverage actually decreased, showing that companies are not overextending themselves. Longer Working Capital Cycles Drive Line Utilization Businesses are holding inventory longer (81 days in 2023 versus 72 in 2019) and extending receivables (31 to 41 days). Those trends have driven an increase in Days Needed Financing from 77 to 93 days. Companies are borrowing more to cover operational costs but continue to pay suppliers on time, with payables remaining under 30 days. Companies need more working capital, but they’re still paying their suppliers as they should. The Resilience of Small Businesses INSIGHTS FOR LENDERS By Kent Kirby, Director of Advisory Services, Abrigo Colorado Banker 10
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