DFS Discover Financial Services

Economic confidence among small business owners rose for the second consecutive month, although concerns about being able to pay their bills jumped significantly in July as measured by the latest Discover® Small Business WatchSM. The index rose to 82.1, up from 80.9 in June.

Cash flow concerns in July hit the highest level in the Watch’s three-year existence. More than half of small business owners, 53 percent, say that in the past 90 days they have encountered temporary cash flow issues that caused them to hold off on paying some bills, up from 42 percent in June.

“Although they seem to have a gradual sense that things are improving in the economy, small business owners are still hurting for profits,” said Ryan Scully, director of Discover's business credit card. “They continue to take home less, more of them are borrowing and the majority have not increased prices in the past six months to reflect higher costs of doing business. We still don’t have a definitive sense whether small business owners will be the ones leading us out of this recession or riding the tailwinds.”

July Highlights:

• 30 percent believe the overall economy is improving, up from 26 percent in June. Those who believe it is getting worse fell to 50 percent, down from 57 percent in June, the lowest reading since May 2007. The other 20 percent aren’t sure or think it’s staying about the same.
• 58 percent of small business owners rate the economy as poor, 35 percent rate it fair and 7 percent say it’s excellent or good.
• 29 percent of small business owners see economic conditions for their businesses improving, up from 25 percent in June, while 46 percent see conditions getting worse and 19 percent say conditions are the same.
• 49 percent of small business owners say they plan to cut spending on business development over the next six months, down from 51 percent in June; 23 percent plan to increase spending, 23 percent are planning no changes and 5 percent aren’t sure.

Mandatory Healthcare Opposed 2-1, Opinions Mixed on Threshold for Exemption

Sixty percent of small business owners say that they oppose any legislation that requires businesses to provide health insurance for their employees. However, when asked which small businesses should be exempt from the law, 39 percent of small business owners favored a recent U.S. Senate proposal that would exclude operations with fewer than 25 employees, 31 percent said it would be better to have a U.S. House proposal that would exempt all businesses with payrolls of less than $250,000; but a sizable 30 percent weren’t sure.

However, if Congress does use payroll as the exemption measure, 49 percent of small business owners said they would oppose a proposal with a $250,000 limit, 40 percent would favor it and 12 percent weren’t sure.

Weathering the Recession: Borrowing Up Sharply

Sixty-five percent of small business owners still have not borrowed money to pay their business expenses; but the number of those who have borrowed was 33 percent in July, up from 19 percent in October 2008.

Interestingly, those who are borrowing aren’t using traditional sources. When asked if they have applied for new credit cards, lines of credit or loans, 82 percent said they had not, while 17 percent said they had and 2 percent weren’t sure. Of those who did apply for loans or credit, 44 percent said their applications were approved, 31 percent were rejected, 7 percent were pending and 18 percent weren’t sure.

Current economic conditions have forced 69 percent of owners to reduce the amount of money they take home from their small businesses, up from 55 percent in October 2008.

“Along with taking home less pay, 60 percent of small business owners also told us they have not adjusted their pricing in the past six months to deal with higher costs of doing business,” Scully said.

Confidence in the federal government has slipped since February. This month, 65 percent of small business owners are not very confident or not at all confident that the federal government and Congress can address the needs of America’s small business owners, up from 62 percent who said the same in February. Only 9 percent are very confident that the federal government can address their needs, down from 12 percent in February, while 23 percent are somewhat confident.

When asked about a proposal to use additional funds from the $700 billion federal stimulus package to expand SBA loan programs, 50 percent of owners say they would favor it, 34 percent are opposed and 16 percent are not sure. At the same time, only 31 percent said that they would consider using such a program in the next six months to help their businesses, while 56 percent said they would not use the program and 13 percent are not sure.

Most Disapprove of President Obama’s Handling of the Economy

As for their view of how President Obama is handling the economy, 52 percent strongly or somewhat disapprove of what he’s doing, while 47 percent strongly or somewhat approve.

The views and opinions expressed by small business owners and consumers who participate in the Small Business Watch survey are their own and do not necessarily reflect those of Discover Financial Services or its affiliates.

About the Small Business Watch

The Discover Small Business Watch is a monthly index measuring the relative economic confidence of U.S. small business owners who have less than five employees, a segment that consists of 22 million businesses producing more than a trillion dollars in annual receipts. The Watch is based on a national random survey of 750 small business owners. It is commissioned by the Discover Business Card, which strives to offer the best business credit card for American small businesses, and is conducted by Rasmussen Reports, LLC (www.rasmussenreports.com), an independent survey research firm. The numeric index is calculated by assigning values to responses to a set of six consistent questions. The base value of the Watch was established at 100.0 based on surveys conducted in August 2006. In addition to generating the index, the Small Business Watch surveys small business owners every month on key issues, and polls 3,000 consumers four times per year to gauge purchasing behavior and attitudes towards small businesses. For past results and survey data, visit www.discovercard.com/business/watch. For information on Discover Business Card, visit www.discovercard.com/business.

About Discover Financial Services

Discover Financial Services (NYSE: DFS) is a leading credit card issuer and electronic payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company operates the Discover Card, America's cash rewards pioneer, and offers student and personal loans, as well as savings products such as certificates of deposit and money market accounts. Its payments businesses consist of the Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in 185 countries and territories. For more information, visit www.discoverfinancial.com.

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