The 12 Federal Reserve Banks today issued the Small Business Credit Survey: 2019 Report on Employer Firms, which examines the findings of an annual survey of small business owners nationwide. The Report focuses on small employer firms, businesses that have between 1 and-499 full- or part-time payroll employees (hereafter “firms”). It is the latest addition to the Reserve Banks’ hub for small business research and analysis, FedSmallBusiness.org.
Fielded in the third and fourth quarters of 2018, the survey finds that while both revenue and employment growth improved from 2017, the share of firms that is profitable remained the same. The outlook for 2019 is more tempered. While credit demand increased marginally in 2018, the share of firms receiving credit remained essentially flat. Startup firms and firms with high credit risk continued to have financing shortfalls. Online lenders1 in particular saw applications increase by approximately one-third from the prior year, even though applicants remained dissatisfied with the interest rates and terms offered, relative to traditional lenders.
Key findings can be found in the 2019 Report on Employer Firms’ executive summary. These findings include:
Performance and Expectations
- The share of firms reporting revenue and employment growth increased from 2017, but the share of firms operating at a profit remained flat.
- More than one-third of small firms (37%) added payroll employees in 2018.
- Employment gains were strongest among startups, firms with five or more employees, firms with more than $1M in annual revenues, and firms with younger decision makers (46 years of age or younger).
- A majority of firms (73%) saw input costs increase in the prior 12 months.
- Expectations for 2019 are mixed with a majority of firms (72%) expecting revenues to increase but 44% planning to add employees.
Financial Challenges and Reliance on Personal Finances
- Nearly two-thirds of firms (64%) continued to experience financial challenges, including difficulties with managing operating expenses, scarcity of credit, and challenges making debt payments.
- Two-thirds of these firms (66%) relied on personal finances to cover their costs, while 40% of firms took out additional debt.
Financing Demand, Approvals and Sources
- Respondents showed consistent year-over-year demand for new financing, with 43% of firms applying for new capital in 2018, similar to 40% in 2017.
- Nearly half of applicants (47%) received the full amount of funding they requested, similar to the 2017 survey.
- Financing shortfalls were particularly pronounced among firms with weak credit profiles, unprofitable firms, younger firms, and firms in urban areas.
- Applications to online lenders continued their growth trend with 32% of applicant firms turning to such lenders in 2018, up from 24% in 2017, and 19% in 2016. These applicants expected online lenders would make faster funding decisions, would be more likely to provide funding, and would not require collateral.
- Applicants who sought funding at large and small banks cited an existing relationship as the primary factor in their choice of lender.
Additional analyses from the 2018 Small Business Credit Survey will be released throughout 2019 at FedSmallBusiness.org. Future releases will take an in-depth look into specific types of small businesses, including nonemployer firms, minority-owned firms, and firms operating in low- and moderate-income communities.
Takeaways Specific to New York Fed’s Region
New York Fed (Second District – CT, NJ, NY)2
- Firms in the Second District were more likely to cite the ‘Chance of being funded’ as a large factor in where they applied for credit, with 57% in the Second District noting this, compared to 48% nationally. They were also less likely to cite ‘Existing relationship with a lender’ (52% compared to 60% nationally) as a factor.
- Second District firms were more likely to have applied for financing in the prior 12 months, with 47% submitting at least one application, compared to 43% nationwide. Online lenders made up a larger percentage of these applications, with 41% of applicants in the Second District applying there, compared to 32% nationally.
- Firms in the Second District were significantly less likely to report revenue increases, with 49% having increased revenues in the prior 12 months compared to 57% nationally.
- Second District firms were less likely to report improving profitability in the prior 12 months (32% compared to 41% nationally). They were also less likely to raise prices (42%) than firms nationwide (49%).
- Second District firms were more likely to report difficulties paying operating expenses (48%) compared to the entire country (40%). Overall, Second District firms experienced financial challenges more often (72%) than firms nationwide (64%).
- Firms in New York State were much more likely to self-report as medium or high credit risks, with 53% compared to 36% nationally.
- Firms in New York State were more likely to report rising input costs (79%) than firms nationwide (73%).
- Firms in New York State were more likely to apply for credit than firms nationally, 52% compared to 43%, respectively.
- New York State firms more often sought credit cards (37%) than firms nationwide (28%).
- New York State firms were less likely to be approved for any amount of financing than firms nationally (66% vs. 78%, respectively). They were also less likely to receive the full amount sought (34% vs. 47% nationally).
- Connecticut firms were much less likely than the national average to report a profit at the end of 2017, 41% vs. 57%, respectively. They were also less likely to raise the prices they charge customers than the national average, 38% vs. 49%, respectively.
- Connecticut firms were significantly more likely to report having financial challenges compared to the national average (73% vs. 64%, respectively). They tended to be more likely to report difficulty paying operating expenses (49%) than the national average (40%).
- Connecticut firms were more likely to rely on external financing to fund their operations (19%) compared to the national average (13%). They were also significantly more likely to hold debt (80%) than the national average (70%).
- Among applicants, Connecticut firms were more likely to report seeking financing to pay operating expenses (52%) than the national average (44%). They were also significantly more likely to seek credit cards for financing (39%) than the national average (28%).
- While Connecticut applicant approval rates were on par with national averages, the proportion approved for full financing (37%), was much lower than for firms nationwide (47%).
(Note: NJ estimates were not available due to insufficient sample size.)
About the Small Business Credit Survey (SBCS)
The SBCS collects information about business performance, financing needs and choices and borrowing experiences of firms with fewer than 500 employees. Responses to theSBCS provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The results are weighted to reflect the full population of small businesses in the United States. The SBCS is not a random sample; therefore, results should be analyzed with awareness of potential methodological biases.
The SBCS includes experiences from firms across all 50 states and the District of Columbia through the joint efforts of the Federal Reserve Banks of New York, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, Philadelphia, Richmond, San Francisco and St. Louis. The 2018 SBCS collected 12,455 responses in total, 6,614 of which were from employer firms.