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Small Employer Firms Reveal More Optimism And Success, Though Financial Challenges Persist For Some

Fed Reserve Banks’ Headline Small Business Report Finds More Firms Are Profitable And Confident; Yet Certain Segments Struggle Acutely With Credit Access, Expenses And More
May 22, 2018

The 12 Federal Reserve Banks today issued the 2017 Small Business Credit Survey: Report on Employer Firms, which examines the results of an annual survey of small business owners nationwide. The Report focuses on small employer firms, businesses that have between 1-499 full- or part-time employees (hereafter “firms”). It builds on the Reserve Banks’ new website FedSmallBusiness.org, which serves as a hub for small business research and analysis.

The Report found that firms’ profitability, revenue growth and employment growth improved, and optimism about future performance reached its highest level in several years. More firms received all of the financing requested, and a significant portion did not apply for credit because they already had sufficient financing. However, despite this success, smaller firms, startups and those in the leisure & hospitality industry continued to struggle acutely with financing challenges.

Key findings can be found in the Report on Employer Firms’ executive summary. These findings include:

Performance and Expectations

  • The share of firms reporting profitability, revenue growth and employment growth all increased from the 2016 survey.
  • Optimism about the coming year reached its highest level since 2015, with a net 66% of firms anticipating revenue growth and a net 44% expecting to hire new employees.

Financing Demand, Approvals and Sources

  • Fewer firms applied for financing, and half of the nonapplicants did not apply because they already had sufficient financing.
  • A larger share of applicants received the full amount of financing requested (46% versus 40% in 2016).
  • Applicants sought financing most frequently at large banks (48%), small banks (47%) and online lenders (24%).
  • Applicants had the most success at community development financial institutions (88% approval rate) and online lenders (75% approval rate). Of note, applications to online lenders increased, but firms were the least satisfied with them.

Financial Challenges and Reliance on Personal Finances

  • Even with this stronger performance, greater optimism and reduced applications for financing, 64% of firms experienced financial challenges.
  • These challenges were particularly acute for startups, those with smaller annual revenues and those in the leisure & hospitality industry.
  • Firms most often addressed financial challenges by using personal funds (67%).

Additional reports on the 2017 Small Business Credit Survey will be released throughout 2018 at FedSmallBusiness.org. These will take an in-depth look into specific types of small businesses, including nonemployer firms, start-ups and minority-owned firms.

Takeaways Specific to Each Federal Reserve Bank’s Region

Note that the takeaways from this section include statewide data of small businesses within each Federal Reserve Bank’s region. These takeaways are provided at a state level even if only sections of certain states are part of a particular Bank’s region.

Atlanta Fed’s Region (Sixth District—AL, FL, GA, LA, MS, TN)

Alabama

  • Alabama firms were more likely to apply to small banks for loans, lines of credits or cash advances. 68% applied at small banks and 34% did so at large banks (versus 47% and 48% nationally). Applications to online lenders were less common; only 2% of small business applicants turned to these lenders for financing (versus 24% nationally).
  • 60% of firms in Alabama have outstanding debt, but those debts tend to be larger than the national average. 18% of firms with outstanding debt owe more than $1 million (versus 9% nationally).
  • Alabama firms sought relatively large amounts of financing. 29% applied for $250 thousand-$1 million in financing (versus 17% nationally), and 13% applied for over a million (versus 8% nationally).

Florida

  • Florida’s small businesses have relatively weak credit profiles compared to firms nationally. 15% were high credit risk (versus 6% nationally), 33% were medium credit risk, (versus 25% nationally), and just 52% were low credit risk (versus 68% nationally).
  • A larger share of Florida’s businesses rely on personal funds as the primary funding source for their business; 29% (versus 18% nationally).
  • 53% of Florida’s small businesses applied for financing in the prior 12 months (versus 40% nationally). SBA loan products are more common; 46% of Florida small business applicants applied for such loans or lines of credit (versus just 26% nationally).
  • Large banks and online lenders play a larger role in Florida’s small business financing landscape than they do nationally. 57% of Florida firms report applying to large banks for loans, lines of credit, or merchant cash advances, and 32% applied to online lenders. Nationally, 48% and 24% of firms did so, respectively.

Georgia

  • Georgia’s small businesses are doing relatively well. A net 28% cited employment growth (versus 19% nationally), 36% reported being profitable, (versus 33% of firms nationally), and a net 30% reported revenue growth (versus 28% nationally).
  • Large banks play a relatively important role in Georgia’s small business financing landscape. 55% of Georgia firms applying for financing do so at a large bank (versus 48% nationally).
  • Most Georgia firms seek financing to expand their business or pursue new opportunities (65% versus 59% nationally). A smaller share do so in order to refinance: 15% among Georgia firms (versus 26% nationally).
  • A relatively large share of Georgia’s small businesses that chose not to apply for financing did so because they were afraid they would be turned down. 22% of such firms in Georgia felt discouraged (versus 13% nationally).

Tennessee

  • Tennessee’s small businesses are doing well. A net 49% reported being profitable, compared to 33% nationally, a net 27% reported employment growth (versus 19% nationally), and a net 31% reported revenue growth (versus 28% nationally).
  • A relatively large share of Tennessee firms are in good credit condition; 79% are a low credit risk (versus 68% nationally). 13% are medium credit risk (versus 25% nationally), and 9 percent are high credit risk (versus 6% nationally).
  • Tennessee firms are less likely to experience any financial challenge than firms are nationally. 50% reported experiencing no financial challenges (versus 36% nationally).
  • A relatively small share of Tennessee firms apply to small banks or online lenders for loans, lines of credit, or cash advances. 36% apply to small banks, and 11% to online lenders (versus 47% and 24% nationally).

Boston Fed’s Region (First District—CT, MA, ME, NH, RI, VT)

First District

  • First District firms were more likely to be profitable than unprofitable; with a net 30% of firms reporting profitability at the end of 2016. Their expectations for revenue growth in the next 12 months were high as well, with a net 65% of firms reporting that they planned to increase revenues.
  • 63% of First District firms reported that they experienced a financial challenge over the prior 12 months. “Paying operating expenses (including wages)” was the challenge that they faced most frequently.
  • The First District has more firms aged 21 years or more (28% in First District versus 23% nationally), and fewer firms aged 0-5 years (29% in First District versus 34% nationally).
  • The First District has more firms where the primary financial decision maker is over 65, compared to the rest of the country (18% in First District versus 13% nationally).

Massachusetts

  • Massachusetts has more firms aged 21 or more years (28% in MA versus 23% nationally) and fewer firms aged 0-5 years (30% versus 34% nationally).
  • 82% of Massachusetts firms indicated that the primary financial decision maker was aged 46 or older compared to 75% nationally.
  • Massachusetts firms are especially optimistic about employment growth over the next 12 months, with a net 59% reporting that they expect to hire new employees compared to 43% nationwide.
  • Massachusetts firms were more likely to report revenue growth over the past 12 months, with a net 39% reporting revenue growth compared to 28% nationwide.
  • 40% of Massachusetts firms indicated that they had applied for financing in the prior 12 months. When asked about the reasons for seeking financing, 71% of firms seeking financing were doing so to expand the business, pursue a new opportunity, or replace capital assets, compared to 59% nationwide.
  • Massachusetts firms often applied to small banks or credit unions (65% versus 56% nationally).

Chicago Fed’s Region (Seventh District—IA, IL, IN, MI, WI)

Seventh District

  • Over a third (34%) of firms nationally were less than five years old. In the Seventh District, however, only 29% of firms fall into this category.
  • The Seventh District includes a larger share of high-revenue small businesses than the country as a whole. 6% of Chicago Fed firms reported more than $10 million in revenue during the previous year. This is higher than the 4% reported nationally, and led by the 7% of Wisconsin firms reporting at least $10 million in revenue. Other states ranged from 5% in Illinois to 6% in Indiana, Iowa and Michigan.
  • The majority of small businesses in both the Seventh District and nationwide employ fewer than five workers, with 53% of Seventh District firms employing 1-4 employees and 55% firms nationwide employing 1-4 employees.
  • Broadly speaking, businesses in the Seventh District report similar challenges and levels of financial health as businesses around the country. Nationwide, 29% of businesses surveyed said they were growing, while 28% of Seventh District firms reported growth.
  • More than two-thirds (68%) of Seventh District firms reported prior outstanding debt; this matched the national statistic.

Cleveland Fed’s Region (Fourth District—KY, OH, PA, WV)

Fourth District

  • Fourth District firms were more likely to rely on external financing as the primary funding source for their businesses than firms nationally (16% versus 11% nationally).
  • Fourth District firms were less likely to have sought financing to meet operating expenses (34% versus 43% nationally).
  • A similar share of Fourth District firms sought financing in the prior 12 months compared to firms nationally (43% compared to 40%), but were, on average, more likely to be approved.
  • Fourth District firms were more likely to have financial decision makers over the age of 55 (49% compared to 43% nationally).

Dallas Fed’s District (Eleventh District—LA, NM, TX)

Eleventh District

  • Businesses in the three states of the Eleventh District had smaller revenues, on average, than the country: 21% earned $100K or less in 2017, compared with 18% nationally.
  • One out of every four small businesses in the Eleventh District is owned by a person of color, a higher share than the national average of 18%.
  • Eleventh District firms that applied for financing were less sensitive to the cost or interest rate of the loan than their national counterparts (34% versus 39% nationally).
  • More Eleventh District firms sought financing in order to meet operating expenses (47% versus 43% nationally) or expand the business (63% versus 59% nationally) rather than pay down existing debt (21% versus 26% nationally).

Texas

  • Texas firms were younger than the national average: 59% were 10 years or younger (versus 54% nationally), and 38% were 5 years or younger (versus 34% nationally).
  • They were also overrepresented at the low and high ends of the revenue spectrum: 23% of Texas firms made $100K or less in 2017 (versus 18% nationally), while 6% made over $1 million (versus 4% nationally).
  • Texas firms were much more likely to be optimistic about future revenues: a net 71% expected to increase their revenues in the next 12 months (versus 64% nationally).
  • Debt aversion is characteristic of Texas firms: of those that did not apply for financing, 32% noted being averse to debt as the primary reason (versus 26% nationally).

New Mexico

  • New Mexico firms were much more likely to be low credit risk than national averages: 79% reported personal credit scores above 719 or a business credit score of 80-100 (versus 68% nationally).
  • New Mexico firms were much less likely to rely on personal funds as the primary financing for their business (11% versus 18% nationally)—opting instead for retained business earnings (74% versus 70% nationally) or external financing (15% versus 11% nationally).
  • Far fewer New Mexico firms applied for financing in 2017 (28% versus 40% nationally).
  • 58% of firms that did not apply for financing reported that they chose not to because they already had sufficient funding.

Kansas City Fed’s Region (Tenth District—CO, KS, MO, NE, NM, OK, WY)

Tenth District

  • Tenth District firms were often low credit risk (72% versus 68% of firms nationally).
  • Tenth District firms were less likely to apply to large banks for credit than firms were nationally over the past 12 months (33% versus 48% nationally).
  • 18% of Tenth District firms applying for credit applied for a Small Business Administration loan or line of credit, compared to 26% nationally.
  • Loans and lines of credit were the most sought after credit product by Tenth District firms. 92% of all firm credit applications were for either a loan or line of credit versus 87% of firms nationally.

Minneapolis Fed’s District (Ninth District—MI, MN, MT, ND, SD, WI)

Ninth District

  • Nearly 60% of Ninth District firms experienced at least one financial challenge in the prior 12 months (versus 64% nationally). Of the Ninth District respondents, paying operating expenses (including wages) was the most frequently cited financial challenge, followed by debt payments, credit availability, and purchasing inventory to fulfill contracts.
  • Ninth District firms faced their financial challenges in the context of relatively positive business conditions. As of the end of 2016, a net 35% were profitable, a net 29% reported revenue growth, and a net 26% reported employment growth over the past year.
  • Performance indices were all above 0 for the U.S. as a whole and for Ninth District states, indicating expansion. Net employment growth for Ninth District firms was 26% (versus 19% nationally).
  • Nearly 30% of Ninth District firms applied for a loan amount greater than $250,000, compared to 25% nationally. In addition, Ninth District firms were more likely to apply to small banks as loan sources (66% versus 47% nationally).

New York Fed’s Region (Second District – CT, NJ, NY)1

Second District

  • Second District firms were more likely to face financial challenges in the past 12 months (70% versus 64% nationally).
  • 38% of firms in the Second District applied for financing in the prior 12 months, similar to 40% of firms that did nationally. However, Second District firms were, on average, slightly less successful.
  • Second District firms were more likely to apply to large banks for loans, lines of credit, or cash advances than firms nationally (62% versus 48% nationally).
  • Among Second District firms that did not apply for financing in the prior 12 months, a higher share than firms nationally were discouraged from applying because they believed they would be turned down (18% versus 13% nationally).

New York

  • New York firms were smaller as measured by annual revenue and number of employees than the national averages: 24% reported annual revenue of $100K or less (versus 18% nationally), and 61% employed 1-4 workers (versus 55% nationally).
  • More New York firms exhibited risk factors compared to firms nationally. 11% identified as being high credit risk (versus 6% nationally), and 71% experienced financial challenges in the prior 12 months (versus 64% nationally).
  • 35% of New York firms applied for financing in the prior 12 months, compared to 40% of firms nationally. New York applicants were approved for financing at a similar rate to firms nationally.
  • New York firms applied to large banks for financing more frequently than firms nationally (59% of New York firms that applied versus 48% nationally).

Philadelphia Fed’s District (Third District—DE, NJ, PA)

Third District

  • More Third District firms exhibited risk factors compared with firms nationwide.
    • 31% of Third District firms were a medium credit risk (versus 25% nationally) and 7% were a high credit risk (versus 6% nationally).
    • 71% of Third District firms had outstanding debt compared with 68% nationally. Many Third District firms experienced the financial challenges of making payments on debt (30% versus 25% nationally), paying operating expenses (42% compared with 40% nationally), and credit availability (32% compared with 30% nationally), similar to national averages.
  • Relative to nationwide averages, higher percentages of Third District firms sought financing for expansion or replacing capital assets.
    • 71% of Third District applicant firms sought financing to expand, pursue new business, or replace capital assets (versus 59% nationally).
  • Third District firms were less likely to report employment growth over the past 12 months, with a net 14% reporting employment growth (versus 19% nationally).
  • Compared with national averages, a higher percentage of Third District firms were owned by men, owned by nonminorities, and located in urban areas.
    • 70% of Third District firms were owned by men (versus 65% nationally) and 11% were equally owned by men and women (versus 15% nationally).
    • 84% of Third District firms were owned by nonminorities compared with 82% nationally. 91% of Third District firms were located in an urban geography (versus 83% nationally).

Pennsylvania

  • More Pennsylvania firms exhibited risk factors compared with firms nationwide.
    • 31% of Pennsylvania firms were a medium credit risk (versus 25% nationally) and 9% were a high credit risk (versus 6% nationally).
    • 72% of Pennsylvania firms had outstanding debt compared with 68% nationally.
    • Pennsylvania firms experienced financial challenges, including difficulty making payments on debt (29% compared with 25% nationally) and credit availability (33% compared with 30% nationally).
  • 25% of Pennsylvania firms were growing, compared with 29% nationwide.
    • Firms in Pennsylvania also reported net increases in employment of 12% (versus 19% nationally).
  • A higher percentage of Pennsylvania firms were owned by men (71% versus 65% nationally) and nonminorities (90% versus 82% nationally) compared with national averages.
  • A similar percentage of Pennsylvania firms sought financing as firms nationally (42% versus 40% nationally), and these applicants also had similar approval rates.
    • 58% of Pennsylvania firms applied for credit at large banks (versus 48% nationally) and 9% applied at community development financial institutions (CDFIs) (versus 5% nationally).
    • Large banks were reported to be the largest source of credit for firms that both applied and did not apply for new products in the past 12 months.
    • 71% of Pennsylvania firms sought financing to expand, pursue new business, or replace capital assets (versus 59% nationally).

Richmond Fed’s Region (Fifth District—DC, MD, NC, SC, VA, WV)

Fifth District

  • Financial Challenges: A larger share of Fifth District firms (40%) reported not experiencing any financial challenges in the prior 12 months compared to U.S. (36%).
  • Growth Expectations: Fifth District firms have higher net expectations for employment growth for the next 12 months (46%) relative to firms nationally (43%).
  • Demand for financing: 40% of Fifth District firms applied for financing in the past 12 months, which matches the national share of firms.
  • Financing Received: On average, Fifth District firms received or were approved for some of the financing for which they applied.

State-level Findings2

  • Reliance on Personal Finances: Fewer firms in Maryland (35%) and Virginia (44%) compared to firms nationally (50%) reported relying on the owners’ personal credit score to obtain financing.
  • Demand for Financing: Demand for financing was modest, with 35% of Maryland firms, 37% of Virginia firms, 38% of North Carolina firms, and 45% of South Carolina firms having applied for financing in the prior 12 months (versus 40% nationally).
  • Financing Received: On average, firms in Maryland, Virginia and North Carolina received or were approved for some of the financing that they applied for, while South Carolina firms received most of the financing that they applied for.
  • Loan/Line of Credit Sources: In regard to sources of loan, line of credit or cash advance, a smaller share of firms in South Carolina (1%) and Virginia (1%) applied to community development financial institutions (CDFIs) compared to firms nationally (5%).
  • Factors Associated with Application Choice:
    • 42% of firms in North Carolina said that the lack of a collateral requirement influenced where they applied for loan, line of credit and cash advance compared to 26% of firms nationally.
    • A larger share of firms in Maryland (42%) and Virginia (41%) were influenced by a recommendation or referral on where they should apply for financing than firms nationally (30%).

San Francisco Fed’s District (Twelfth District—AK, AZ, CA, HI, ID, NV, OR, UT, WA)

Twelfth District

  • Twelfth District firms were more likely to face financial challenges in the past 12 months (68% versus 64% nationally), with a larger share reporting challenges related to credit availability (37% versus 30% nationally).
  • A larger share of Twelfth District firms rely on personal funds as their primary funding source compared to the national average (21% versus 18% nationally).
  • The Twelfth District had a similar share of businesses that applied for financing in the past 12 months, at 40%, but a larger share of those applying were seeking financing to meet operating expenses (51% versus 43% nationally).
  • Relative to the national average, 12th District firms were more likely to apply to large banks (54% versus 48% nationally) and online lenders (30% versus 24% nationally). Twelfth District applicants were approved for financing at a lower rate, on average, than firms nationally.

California

  • California firms were on the larger size compared to the national average, in terms of revenue size, with 31% reporting revenues between $1M-$10M (versus 27% nationally). Although California firms were similar to the firms nationwide in terms of number of employees, California firms were more likely to report using contract workers (47% versus 39% nationally).
  • 70% of California firms faced financial challenges in the past 12 months (versus 64% nationally). The top financial challenges faced by firms in the state were paying operating expenses (including wages) and credit availability, at rates of 42% and 39% respectively.
  • 64% of California firms had prior outstanding debt, similar to 68% nationally, and 5% had outstanding debt of $1M, compared to 9% nationally.
  • 38% of California firms sought financing in the prior 12 months, on par with the national average of 40%, but a larger share sought financing to meet operating expenses (54% versus 43% nationally). California firms that applied for financing were approved for financing at a lower rate, on average, than firms nationally.
  • California firms often applied to large banks for financing (58% versus 48% nationally), and less frequently to small banks (38% versus 47% nationally).

St. Louis Fed’s Region (Eighth District—AR, IL, IN, KY, MO, MS, TN)

Missouri

  • Missouri firms are similar in size to the national averages—by annual revenue and number of employees. 19% reported annual revenue of $100K or less (versus 18% nationally), and 57% employed 1-4 workers (versus 55% nationally).
  • Missouri firms were less likely to be growing (21% versus 29% nationally). Growing firms increased their revenues and workforce in the prior 12 months and do not expect their workforce to decline in the next 12 months.
  • 43% of Missouri firms applied for financing in the prior 12 months (versus 40% firms nationally). Among firms that did not apply, 40% reported being averse to taking on debt, compared to 26% nationally.
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 the SBCS 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 Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco and St. Louis. The 2017 SBCS collected 14,465 responses in total, 8,169 of which were from employer firms.



1 Note that the New York Fed’s region (the Second District) includes New York state, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the U.S. Virgin Islands. Note that the bullets in this section include statewide data from New York, New Jersey and Connecticut. This report does not include data for Puerto Rico or the U.S. Virgin Islands. The business experiences and needs on these islands differ considerably from those on the mainland and there will be a separate report on small businesses in Puerto Rico later this year.

2 Based on results from Maryland (176), North Carolina (215), South Carolina (147) and Virginia (267).