Throughout the recession, reduced access to credit has made it difficult for manufacturers to maintain earlier levels of expenditure and investment, narrowing the opportunities for growth and causing many businesses to seek alternatives to bank lending. In buying consortium Prime Advantage's Group Outlook Survey last month, the second greatest concern of small and midsized manufacturers was the state of credit markets and interest rates, following customer demand.

However, new data show that credit conditions are improving in the United State and abroad. With fewer firms at risk of defaulting, credit availability may soon be on the upswing.

According to the September Credit Managers' Index (CMI) from the National Association of Credit Management (NACM), U.S. credit conditions and performance are improving at an increasing rate. The index reading for combined indicators rose to 49.8 in September, up from 48.1 in August and 48 in July (with readings above 50 signaling growth). The latest reading represented a 1.7 percent increase in September, significantly higher than the August growth of 0.1 percent and the peak level for the past 11 months.

The NACM report attributes these gains to "some dramatic improvements in dollar collections," as well as "reductions in accounts placed for collection and dollar amount beyond terms." Throughout much of last year, many companies attempting to weather the downturn fell behind or chose to delay bill payments in order to maintain an operational level of cash flow. But more businesses are now beginning to catch up with their accounts and becoming current with creditors and lenders.

"There has been some movement in sales and some positive movement in terms of credit availability, but up to this point there hadn't really been positive news regarding payment on that debt. Now all three factors seem to be moving in a generally positive direction," Chris Kuehl, an economic analyst for the NACM, said in the report issued last week.

Credit conditions for the manufacturing sector reflected the overall improvements from last month. The index for manufacturing credit rose to 49.6 in September, up from 48.5 in August and 48.3 in July. This marked a 1.1 percent increase following a 0.2 percent rise in August. It was the eighth consecutive month of credit improvement in manufacturing and the highest credit performance level the sector had reached in a year.

"While the CMI was primarily driven by some positive factors, the reduction of some negative factors had a greater influence on the manufacturing index," Kuehl explained. "Given the horrific year that manufacturers have been through, it is more than encouraging to note that bankruptcies and delinquencies are ebbing and that credit is getting back in shape after the long period of decline."

Credit conditions are also showing promising signs in other countries, providing support for the prospect of increased trade and international business activity. According to a recent quarterly survey from the Bank of England, credit availability for corporations, including medium- and large-sized firms, showed a net increase in the third quarter, continuing the ongoing trend since the start of 2009.

Among small businesses, there was a net increase of 11.2 percent for demand for secured lending from small businesses in the past three months, as well as a 13.1 percent gain in demand expected for the coming three months.

Meanwhile, the number of companies at risk of defaulting on their debt decreased by 2.3 percentage points in August, falling to 12.4 percent of the total number of public companies worldwide, according to a September report from the risk management consultant Kamakura Corporation.

Companies with a default probability above 20 percent fell to 1 percent of the total; those with 10 percent to 20 percent risk dropped to 1.3 percent of the total; those with 5 percent to 10 percent risk fell to 1.8 percent of the total; and companies with a 1 percent to 5 percent default risk accounted for 8.4 percent of the total.

This marked the fifth consecutive month of improvement in global credit quality, with overall credit conditions now better than the average recorded by the Kamakura index between 1990 and 2008.

As fewer companies run the risk of defaulting on their loans and more firms are able to rebuild their accounts, credit availability in the U.S. and elsewhere in the world will likely began to grow. For the manufacturing sector, this will mean improved cash flow and better access to capital, marking a major step toward the return to economic health.

Earlier: Where to Go When Banks Say No

Research

Latest Group Outlook Survey ... Indicates Manufacturers Becoming Optimistic about Economy
Prime Advantage, Sept. 2, 2009

Credit Managers' Index: Report for September 2009
National Association of Credit Management, Oct. 1, 2009

Credit Conditions Survey: 2009 Q3
Bank of England, Oct. 1, 2009

...Fifth Consecutive Improvement in Global Credit Quality in August
Kamakura Corporation, Sept. 1, 2009