2017 Small Business Credit Survey Report on Employer Firms

The Small Business Credit Survey (SBCS), a national collaboration of the 12 Federal Reserve Banks, provides timely information on small business financing needs, decisions, and outcomes to policy makers, researchers, lenders, and service providers.

The report findings provide an in-depth look at small business performance, debt holdings, and credit experiences. Fielded in Q3 and Q4 2017, the survey yielded 8,169 responses from small employer firms, businesses that have 1-499 full- or part-time employees (hereafter “firms”), in the 50 states and the District of Columbia. New features of this year’s report include expanded time trend information and a detailed look at the credit experiences of firms by various segments, including revenue size, age, and industry. The survey findings complement other national data on aggregate lending volumes and lender perceptions.¹

Heading into 2018, small businesses reported stronger revenue growth and profitability but continued financial challenges for some segments of firms. Overall, the survey finds:

• Improved performance in 2017 and heightened optimism for revenue and employment growth in 2018.
• Comparatively weaker demand for new financing, with a smaller share of firms applying for new capital than in prior years and half of nonapplicants reporting that they had sufficient financing.
• Improved financing success for applicants, with a larger share receiving the full amount of financing requested and higher success rates for loan and line of credit applicants compared to 2016.
• A moderate increase in applications to online lenders² overall in 2017, with notably higher application rates among self-reported medium and high credit risk firms.
• Continued financial challenges—most commonly, paying operating expenses and wages, and credit availability—for some firm segments, particularly recent credit applicants, micro firms (≤$100K in annual revenues), startups (0-5 years), and firms in the leisure and hospitality industry.

More detailed findings include:

Improved Performance and Heightened Optimism

• In 2017, a majority of firms reported they were profitable and had growing revenues. The net share of firms reporting profitability, revenue growth, and employment growth all increased from 2016 levels.
• Expectations for revenue and employment reached their highest levels since 2015. Reflective of this optimism, a net 66% of firms anticipate revenue growth in 2018, while a net 44% expect to hire new employees.

Weaker Demand for New Financing

• Demand for financing declined modestly, with 40% of firms applying for funding, down from 45% in 2016.
• As in previous years, most applicant firms (55%) were seeking $100K or less in financing; three quarters sought $250K or less.
• Though applicants most frequently sought credit for expansion (59%), borrowing needs also reflected uneven cash flow and cost pressures, with sizable shares borrowing to fund operating expenses including wages (43%), and to refinance (26%).
• Applicants on average continued to report a higher incidence of credit risk factors than nonapplicants: a smaller share were profitable, and larger shares reported low credit scores or reported experiencing financial challenges in the prior year.
• Firms sought financing most frequently at large banks (48%), small banks (47%), and online lenders (24%). However, a notable share (18%) turned to other lenders, including auto/equipment dealers, farm lending institutions, friends/family, nonprofits, private investors, and government entities.
• Among nonapplicants, 50% did not apply because they had sufficient financing. Another 26% were averse to taking on debt, and 13% did not apply because they believed they would be turned down.

Improved Financing Success But Noteworthy Gaps

• A larger share of applicants received the full amount of financing requested—46% in 2017, compared to 40% in 2016.
• Firms also reported higher success rates for loan and line of credit applications, with 59% receiving all of the credit requested, up from 53% in 2016.
• Financing shortfalls—receiving less than the amount requested—were more common among micro firms (annual revenues of $100K or less) and startups (0-5 years). 70% of micro firm applicants and 61% of startups experienced shortfalls.
• There were other notable funding shortfalls that varied across credit-risk categories. 44% of firms with low credit risk experienced a financing gap, compared to 71% of medium credit risk firms and 90% of firms with high credit risk. Firms most frequently attributed these shortfalls to insufficient credit histories and insufficient collateral.

Moderately Increased Applications to Online Lenders

• Applications to online lenders increased to 24% in 2017, up from 21% in 2016.
• This percentage is higher among self-reported medium/high credit risk firms, with 40% applying to online providers—nearly the same share that applied to large banks (49%) and small banks (47%).
• Medium/high credit risk applicants were most successful in obtaining funding for loans, lines of credit, or cash advances from online sources; 71% were funded at online providers, compared with success rates of 35% at large banks, 47% at small banks, and 26% at credit unions.
• Applicants to online lenders report being attracted by the speed of credit decisions, improved funding chances, and lack of collateral requirements. Net borrower satisfaction with online providers has also increased from 19% in 2015 to 35% in 2017.
• However, applicants to online lenders cited challenges with high interest rates and unfavorable repayment terms more often than applicants to other lenders. They also remain the least satisfied among applicants at all types of lenders.
• These findings are consistent with net satisfaction levels reported by nonapplicant debt holders, which ranged from a high of 81% for credit unions to a low of 43% for online lenders.

Continued Financial Challenges for Some Segments

• 64% of firms experienced financial challenges in the last year.
• While the most common challenges overall were paying operating expenses (40%) and credit availability (30%), these challenges were particularly acute for firms with annual revenues of $100K or less (52% and 36%, respectively), and for startups (46% and 39%, respectively).
• For leisure and hospitality firms, almost half reported difficulty paying operating expenses (48%), and another 38% had difficulty making payments on debt, higher shares than firms in other industries.
• Firms most often addressed financial challenges by using personal funds—67% of business owners used personal finances to do so, and 39% took out additional debt.