Small business loans less risky than junk bonds?

By Reuters
Posted Oct. 18, 2010 at 9:42 a.m.

In the world of high-yield securities, small business loans are safer than junk bonds, and are expected to get even less risky over the next two years, according to PayNet, which provides risk-management tools to the commercial lending industry.

An analysis of default rates since 2006 shows that on average, small businesses reneged on loans at an average rate of 6.9 percent, William Phelan, PayNet’s president and founder, said in an interview.

That’s less than the 12.9 percent default rate that Moody’s Investors Service estimated for speculative-grade bonds, he said.

Defaults by small businesses are expected to decline, on average, to 4.6 percent this year and 3.9 percent next year, based on an analysis of PayNet data by Stanford University Business School professor Darrell Duffie.

The new data should boost confidence in small businesses as investment targets and increase banks’ willingness to lend to them, Phelan said.

“Small business loans were not the risk boogeyman that everyone thought they were,” he said.

PayNet collects real-time loan information, such as originations and delinquencies, from more than 200 leading U.S. capital equipment lenders.

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