U.S. small business borrowing rises to six-year high

Small U.S. businesses took on more debt in July, pushing an index of borrowing to a six-year high and adding to evidence that the economic recovery is on firmer ground.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 11 percent in July to 117.7, the highest level since August 2007.

The index registered 105.7 in June, PayNet said on Wednesday, revised from an initial reading of 104.8.

Historically, PayNet's lending index has correlated to overall economic growth one or two quarters in the future.

The stronger reading in July, up 12 percent from a year earlier, came as the Federal Reserve signaled it is prepared to begin reducing its massive stimulus program as soon as this month.

Long-term borrowing costs rose in response. But the U.S. central bank has kept short-term rates near zero, where they've been since December 2008, and has promised to keep them there until the labor market strengthens further. That's helped encourage small businesses to borrow and invest.

"There is some optimism returning to small businesses...they are responding to some demand," PayNet President Bill Phelan said in an interview. "As long as interest rates are within reasonable boundaries....a strong economy with demand is better than a weak one with low interest rates."

The U.S. economy grew at an average pace of 1.8 percent in the first half of the year, with second-quarter growth coming in at 2.5 percent.

Fed Chairman Ben Bernanke said in June that the Fed expects to be able to reduce its $85 billion bond-buying program later this year and end it in the middle of next year "if subsequent data remain broadly aligned with our current expectations for the economy."

Because small companies typically take out loans to buy new tools, factories and equipment, more borrowing could signal more hiring ahead. The outlook for the jobs market is crucial to the Fed's decision on whether to cut back on its bond-buying stimulus.

Low financial stress at small businesses, with more of them paying back loans on time, could also bode well for future borrowing.

Delinquencies of 31 to 180 days fell in July to an all-time low of 1.48 percent of all loans made, according to the Thomson Reuters/PayNet Small Business Delinquency Index.

Accounts overdue as a percentage of all loans have fallen steadily since rising as high as 4.73 percent in August 2009.

PayNet collects real-time loan information such as originations and delinquencies from more than 250 leading U.S. lenders.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)