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Cover of the Report on Rural Employer Firms based on the 2016 Small Business Credit Survey

How do rural small businesses compare with their urban counterparts?

2016 Small Business Credit Survey: Report on Rural Employer Firms

The physical location of rural small employer firms1 in less densely populated areas presents an economic, demographic and cultural context that is distinct from the one in which urban small employer firms operate. This Report on Rural Employer Firms compares the business and financing conditions of small employer firms located in rural areas2 to those located in urban areas. This report is part of a series of reports that use data from the 2016 Small Business Credit Survey (SBCS), a national data-collection effort by the twelve Federal Reserve Banks. All differences between urban and rural small employer firms highlighted in this report are statistically significant based on credibility intervals.3

Like the nation’s population, most small businesses are located in urban areas.4 Seventeen percent of employer firms are located in rural areas of the country. Map 1 shows the geographic location of urban and rural SBCS respondents, according to the zip code of the employer firm.

Map 1: Geographic Distribution of SBCS Respondent Firms by Zip Code5

This report addresses the following questions:

  • What characteristics besides their location distinguish rural small employer firms from those in urban areas?
  • How does the typical rural small employer firm conduct its search for financing?
  • How successful are rural small employer firms in their financing search?
  • What factors are associated with a successful financing search for rural small employer firms?

Compared to firms located in urban areas,

Firms in rural areas are more stable.

  • Rural small employer firms are less likely to be growing:6 23 percent compared to 30 percent of urban firms.
  • Rural small employer firms tend to be older than urban firms: 30 percent are over 20 years old compared to 22 percent of urban firms.
  • Rural small employer firms are less likely to apply for financing to expand their business: 57 percent of applicant rural firms compared to 65 percent of applicant urban firms.

Firms in rural areas face less financing constraints.

  • Rural small employer firms, on average, report having higher credit scores: 71 percent of rural small employer firms are low credit risk7 compared to 64 percent of urban firms.
  • A smaller share of rural small employer firms experienced financial challenges in the prior 12 months: 55 percent of rural small employer firms compared to 62 percent of urban firms.
  • Rural small employer firms were more likely to indicate that they had sufficient financing: 51 percent of rural small employer firms compared to 45 percent of urban firms.
  • A larger share of rural small employer firms received the full amount of financing they were seeking: 51 percent of applicant rural firms compared to 38 percent of applicant urban firms.

Small banks play a bigger role in rural areas.

  • Banks in rural areas are more likely to be small,8 and rural small employer firms are more likely to apply to a small bank than to a large bank.9
  • Rural small employer firms’ ability to access credit is partially attributable to differences in firm characteristics and the share of small bank branches in a respondent’s zip code. Small banks comprise a relatively larger portion of the banking sector in rural areas. When the market concentrations of small banks in urban and rural zip codes are held constant, urban and rural small employer firms received similar shares of the amount they requested.



1 For the purposes of this report, small employer firms are firms with one to 499 employees, not including the owner(s).

2 Businesses are classified as being in a rural location if their zip code is not economically connected to an urban cluster of at least 50,000 people. Zip code-level Rural-Urban Commuting Area Codes (RUCAs) can be found at http://depts.washington.edu/uwruca/. RUCAs of 4.0 or higher are classified as ‘rural’.

3 A credibility interval is a model-based version of a confidence interval and is used because the sample is not random. See the Methodology section for a full explanation.

4 According to the U.S. Census the share of the population located in rural areas was 19.3 percent in 2010.

5 Alaska and Hawaii are not shown on Map 1, but are included in survey results.

6 Growing firms are defined as firms that expanded their workforce and had an increase in revenues from approximately the second half of 2015 through the second half of 2016 and that did not anticipate declines in their workforce numbers from approximately the second half of 2016 through the second half of 2017.

7 Self-reported business credit score or personal credit score, depending on which is used to obtain financing for their business. If the firm uses both, the higher risk rating is used. 'Low credit risk' is a 80-100 business credit score or 720+ personal credit score. 'Medium credit risk' is a 50–79 business credit score or a 620–719 personal credit score. 'High credit risk' is a 1–49 business credit score or a < 620 personal credit score.

8 The geospatial analysis of small banks in this report relies on the small bank definition provided by the Federal Deposit Insurance Corporation (FDIC), which they define as banks with $10B or less in total assets.

9 The SBCS defines small banks as banks with less than $10B in total deposits.





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