2016 Small Business Credit Survey Report on Microbusinesses

This report is one in a series based on the findings of the 2016 Small Business Credit Survey (SBCS), a national collaboration of the Community Development Offices of the 12 Federal Reserve Banks. As a supplement to the Report on Employer Firms¹ released in April 2017, this Report on Microbusinesses details findings on the financing experiences and outcomes of the smallest firms in the United States, including the self-employed.

Microbusinesses account for about 9 in 10 firms and about 34.9 million jobs in the United States.² These firms, therefore, play a vital role in the nation's economy. Furthermore, microbusinesses provide important economic opportunities for both women and minority business owners.³ Still, relatively little is known about the performance and financing needs of these small businesses.

The SBCS gathers timely insight to help address gaps in researchers' and policymakers' understanding of the experiences of this important segment of businesses.

This report compares the survey findings for three groups of small firms represented in the SBCS sample:

• Nonemployers – firms with no employees other than the business owner(s)
• Small employers – firms with one to four employees
• Larger employers – firms with 5 to 499 employees

For purposes of this report, nonemployers and small employers are collectively referred to as microbusinesses.

Key Findings

Microbusinesses are less profitable than larger employers and face more financial challenges.

• Nonemployers in particular report challenges with profitability and are just as likely to be operating at a loss as at a profit. Similarly, microbusinesses are less likely to report revenue growth in the prior 12 months. While 54 percent of larger employers reported facing financial challenges, the same was true of 61 percent of nonemployers. Some of their financial challenges may be attributed to the age of these small firms, as they are considerably younger and less established, on average, than the larger employers.

Microbusinesses are less likely than larger employers to apply for financing.

• Just 30 percent of microbusinesses applied for financing in the prior 12 months compared to 50 percent of larger employer firms. Like larger firms, those microbusinesses that sought funding did so to expand their businesses or pursue new opportunities. Among applicants, 72 percent applied for less than $100k in financing, and just over a third applied for less than $25k. Though microbusinesses seek smaller amounts of financing, they are more likely to be discouraged about their prospects for approval.

Microbusinesses are less likely than larger employers to be approved for financing.

• Nonemployers were more likely to report a funding shortfall, with 73 percent indicating they had been approved for less than the amount of financing needed or for no financing at all. Of small employers, 65 percent had a funding shortfall versus 52 percent of larger employer firms, a variance that may be partially explained by differences in credit scores. However, even among firms with similar credit scores, a smaller share of microbusinesses reported they received all the funding they sought, compared to the share of larger employers reporting the same thing.

Additional Findings

Microbusinesses are reliant on the personal finances of their owners.

• Of all firms, nonemployers are most reliant on the personal finances of their owners to secure funding for their business. Sixty-five percent use only the personal credit score of their owner(s) when applying for financing. Furthermore, these firms are least likely to provide business assets as collateral to secure debt and instead rely on personal guarantees and personal assets.
• In order to fund their business operations, 45 percent of nonemployers and 26 percent of small employers rely primarily on their owners' personal funds, compared to 15 percent of larger employer firms.
• Roughly four in five microbusinesses that reported financial challenges addressed the challenges using personal funds.

Microbusinesses that sought financing most often applied for loans, credit lines, and credit cards. Large banks were the source to which microbusinesses most frequently applied.

• Among microbusinesses that applied for financing, loans, lines of credit, and credit cards were the most common products. Microbusinesses were more likely than larger employers to apply for a credit card.
• Twenty-four percent of nonemployers that applied for a loan or line of credit sought personal loans to fund their businesses, compared to 10 percent of employer firms.
• For firms of all employment sizes, banks were the most common source applicants turned to for financing. Nonemployers were considerably less likely than employer firms to apply at a small bank. In addition, microbusinesses were more likely than larger employers to apply at credit unions and online lenders.

Microbusinesses are less likely to report that their funding needs are fully met, and they are less satisfied with their lenders.

• Fewer microbusinesses received all the funding they sought, relative to larger firms. While 48 percent of larger employers reported their funding needs were fully met, just 27 percent of nonemployers and 35 percent of small employers reported the same.
• Similarly, microbusinesses reported lower approval rates for all types of loan/line of credit products and at all sources. Microbusinesses that were not approved for financing most often cited low credit scores and insufficient credit history as the primary reasons.
• Like larger employers, microbusinesses that were approved for at least some financing reported greatest satisfaction with small banks. However, compared to larger firms, microbusinesses reported lower satisfaction with large banks, small banks, and online lenders.

Microbusinesses that did not apply for financing most often reported they had sufficient funding; their most-used credit products are credit cards, loans, credit lines, and cash advances.

• Among the 70 percent of microbusinesses that did not apply for financing in the prior 12 months, these firms most often reported that they had sufficient financing already or they were debt averse as the primary reasons they did not seek funding. Thirty-two percent of nonemployers and 29% of small employers were debt averse, compared to 23 percent of larger employers.
• In addition, among nonapplicants, 23 percent of nonemployers and 19 percent of small employers were discouraged—they did not apply because they did not expect they would be approved for financing. This was the case for only 12 percent of larger employers.
• Nonapplicant microbusinesses that did not apply for financing in the prior 12 months were less likely than larger employers to use external financing on a regular basis. Thirty six percent of microbusinesses use no external financing compared to 21 percent of larger employers. Among microbusinesses that do use financing, these firms most commonly use credit cards, loans and lines of credit, and cash advances.