2017 Small Business Credit Survey Report on Disaster-Affected Firms

The Small Business Credit Survey (SBCS), an annual survey fielded by the 12 Federal Reserve Banks, offers a unique opportunity to evaluate which types of firms are hit hardest by natural disasters, the magnitude and source of their losses, and the types of financial assistance they seek. The survey's main questionnaire focuses on firms' financing and credit needs and outcomes. In 2017, following widespread natural disasters, the SBCS included a special module of questions for firms located in FEMA-designated disaster zip codes.

This report draws on Census data and the SBCS dataset to understand the unique attributes of FEMA-designated disaster areas in late 2016 and 2017, and the performance, experiences, and financing needs of firms with natural disaster-related losses. Our analysis compares firms that were located in natural disaster-affected areas but did not face damages (defined below as "unaffected firms") to those that did (defined below as "affected firms"). The charts in the report were selected for inclusion based on regression analyses that enabled us to test which relationships were meaningful, controlling for multiple factors. Statistical differences highlighted in the charts are statistically significant. For details about the statistical models and significance levels, please consult the Appendix.

Note on credit applications: Survey respondents were asked about their credit applications during the prior 12 months. Affected firms' credit applications may include applications filed before the storm losses. We attempt to control for the effects of the storms by comparing affected and unaffected firms in storm-affected areas, with the unaffected firms serving as a baseline of "normal credit application behavior." However, the analysis should be interpreted as suggestive of correlations, not as an interpretation of causation.

Note: This report does not include data for Puerto Rico or the U.S. Virgin Islands, areas that experienced extensive damage in 2017 from Hurricanes Irma and Maria. The business experiences and needs on these islands differ considerably from those on the mainland. With that in mind, we conduct a separate annual small business survey to gauge the needs of Puerto Rico specifically.¹

The following are key findings from our analysis.

Finding 1: Natural disaster-affected areas in 2016 and 2017 differed from the U.S. overall in notable ways²

• The natural disasters that struck during this time period were concentrated in the Southeast (North Carolina, South Carolina, Georgia, and Florida), Michigan, Mississippi, Arkansas, Texas, and California.
• FEMA-designated disaster zip codes contained a higher share of individuals who identify as Hispanic or African American.
• These zip codes were also more likely to contain individuals who were foreign born and speak a language other than English at home.
• These zip codes also had a slightly lower mean income than the U.S. overall.
• In other ways, including employment and educational attainment, the demographics in disaster-affected zip codes were not substantially different from the U.S. overall.

Finding 2: In disaster-affected areas, losses were fairly common

• 40% of small firms within FEMA-designated zip codes reported natural disaster-related losses.

Finding 3: Disasters struck small firms across the age and income spectrum, but losses were concentrated among Hispanic-owned firms and firms in the retail and leisure & hospitality industries

• Women- and men-owned firms were equally likely to report natural disaster-related losses (41% and 38%, respectively), as were firms in low- and medium-to-high income zip codes (40% and 39%, respectively).
• 54% of Hispanic-owned firms in affected areas reported natural disaster-related losses, compared to 40% of White-owned firms and 35% of Black or African American-owned firms.
• More than half of leisure & hospitality firms (52%) and 47% of retail firms in affected areas reported natural disaster-related losses, the highest shares of all industries.

Finding 4: Foregone revenues, not assets, were the largest source of losses

• Of the affected firms, 36% did not lose any assets, 45% had asset losses ranging from $1-$25,000, and only 19% lost more than $25,000.
• Of the affected firms, only 4% did not have any revenue losses, 61% had revenue losses ranging from $1-$25,000, and 35% lost more than $25,000.

Finding 5: Affected firms reported sizable revenue and employment gaps and elevated incidence of financial challenges compared to unaffected firms

• Among affected firms, the net percent reporting revenue gains was half that of unaffected firms (15% compared with 30%).
• Similarly, affected firms were slightly less likely to report net employment gains (8% compared to 12%).
• Affected firms were more likely to experience difficulties with paying operating expenses, credit availability, making payments on debt, and purchasing inventory than firms without losses.

Finding 6: Firms' insurance holdings appear to be mismatched to the sources of their damages, leaving uncovered losses

• 65% of affected firms cited loss of power or utilities as the source of their losses. However, only 17% of affected firms had business disruption insurance at the time of the disaster.
• Flood damage (38%) and wind damage (36%) were also common sources of losses, but only 16% of affected firms had specific flood insurance coverage and only 21% had wind insurance.

Finding 7: More affected firms applied for credit financing, including SBA loans, than disaster relief. The hardest hit firms tended to hedge, applying for both disaster assistance and financing

• Nearly half of affected firms (48%) reported they would not apply for disaster relief.
• Firms with both large and small revenue losses were more likely to apply for credit financing than to seek disaster assistance. 76% of firms with high revenue losses applied for external financing, compared to 48% that sought disaster assistance. Of the firms with low revenue losses, 11% sought disaster assistance, but 34% applied for external financing.
• Nearly half (45%) of firms with the highest revenue losses applied for both disaster assistance and external financing.

Finding 8: Affected firms sought credit at higher rates than unaffected firms

• Affected firms were 1.5 times as likely to apply for credit as unaffected firms (48% applied compared to 30%).
• Affected firms had small financing needs (62% applied for $100k or less).
• Affected firms were most likely to apply to large banks. They were also more likely to seek financing from alternative sources: 31% applied online, compared to 23% of firms without losses, and 34% went to "other lenders"³ compared to 15% of firms without losses.
• For affected firms, SBA loans and lines of credit were important products. They were the second most commonly applied for product: 45% of firms applied for them, compared to 27% of firms without losses.

Finding 9: Affected firms are higher risk and experience notable funding gaps

• Affected firms exhibited several higher risk factors, including higher credit risk, lower profitability, and greater incidence of financial challenges.
• 66% of affected firms that applied for financing experienced a funding gap, receiving less than the amount requested, compared to 55% of unaffected firms.
• For loan, line of credit, and cash advance applications, affected firms were also less successful at obtaining funding (65% compared to 72%). This gap persists for the most popular loan/line of credit products: business loans (43% success compared to 54%), lines of credit (53% success compared to 70%), and SBA loans/lines of credit (37% success compared to 46%).

Finding 10: High levels of optimism for 2018 among affected firms

• Despite recent challenges, affected firms expressed consistent levels of optimism about future employment and revenue growth compared to unaffected firms.
• For sectors where losses were more highly concentrated, including retail and leisure, these findings are consistent with previous studies that found these sectors were quick to adapt and reopen.