The small business loans of $1 million or less have been falling in number for the past three years are having a damaging effect on small business jobs, according to data from Federal Deposit Insurance Corporation. The lack of funding seems to be taking its toll with only 7 percent of small businesses planning to create new jobs over the next three months, according to National Federation of Independent Business’ (NFIB) latest Small Business Optimism Index.  This is bad news for payroll processing firms like ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX) which rely on small business clients.
We currently have a $57.67 Trefis price estimate for ADP, about 8% above the market estimate.
Small businesses are a major driver of employment
Between 1993 and 2009, nearly 65% of jobs created came from companies with fewer than 500 employees. However as small business loans continue to fall they are becoming more reluctant to create new jobs.
The issue it seems is not that banks don’t have enough money to lend but rather that the small businesses are not borrowing. According to NFIB surveys, 15 percent of companies refrained from applying for loan believing they will not be granted one while 24 percent reduced the amount they applied for in order to improve their chances of being approved for funding.
In spite of funding problems, NFIB’s November index saw a modest uptick in employment with respondents reporting an overall increase of 0.12 workers per company. ADP’s National Employment Report also noted that small businesses were responsible for more than half of the 206,000 new jobs in private sector in the US from October to November.
Even though the small businesses have continued to create jobs in recent months, the pessimism amongst small businesses is not a good sign and could negatively impact job creation in the future. This could result in a downside to our $57.67 Trefis price estimate for ADP.
Paychex could be worse hit
Unlike ADP, Paychex primarily caters to small business clients and as such faces a potentially greater risk if the number of small business employees actually decreases due to lack of funding.
We currently have a $29.73 Trefis price estimate for Paychex, roughly in line with the market estimate.Notes:
- Small business bank loans hit 12-year low, damaging job creation, amsterdamprinting.com [↩]