Thinking about investing in a small business? Do not head West; go South.
At least that’s the takeaway from new data published by WAIN Street, a company whose monthly index predicts the likelihood of 18 million small businesses in a variety of sectors and geographic regions to default on financial obligations. The index aggregates micro-level indicators of credit performance such as bankruptcy and delinquency concerning U.S. businesses with a headcount of fewer than 20, but excludes sole proprietors and businesses with a single owner/operator.
WAIN Street publisher and financial analyst Vidur Dhanda reports that, overall, his Business Default Index—quoted as a seasonally adjusted, annualized default rate—showed an improvement of 0.06 percent between September and October, but says the improvement was narrow with a near equal number of businesses improving and deteriorating in credit quality.
“The improvement is remarkable considering the drama in D.C. at the start of October,” Dhanda says. But he warns against reading too much into the headline number. “Businesses continue to face strong headwinds as reflected in the steep decline in consumer confidence, weak business investment, and decrease in small business optimism,” he says.
Dhanda explains that the Business Default Index is the “current conditions” component of WAIN Street’s broader Business Credit Health Index, which he says presents the most comprehensive analysis of business data ever undertaken: over 10 billion data points including information from almost every business in the U.S.
Broken out by region, WAIN Street data formerly showed Midwestern businesses with the highest credit quality. But the South overtook the Midwest early this year as the region whose businesses present lenders with the lowest risk.
And while WAIN Street reports that the West lags the nation in credit quality, making businesses there the highest risk borrowers, it indicates that the Northeast also lags the nation and has been deteriorating for nearly two years.
More specifically, the index indicates that businesses in Louisiana, Alaska, and South Dakota default at a rate less than half the national rate. Virginia, Maine, Nebraska, Mississippi, and Vermont are home to the second tier of safe bets.
Arizona, Nevada, and Illinois are the riskiest places to make a small business loan, according to WAIN Street, because businesses there default at a rate more than double the national rate. California, New Mexico, Massachusetts, New York, and Washington, DC, are home to the next-riskiest group of small business borrowers.
By sector, WAIN Street data show that construction businesses default at a rate 1.5 percent higher than the national rate, information businesses default at a rate 1.5 percent lower than national, and mining is continuing a six-month downslide in credit quality, according to WAIN Street.