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Cover of Report on Nonemployer Firms from 2017 Small Business Credit Survey

Nonemployer firms make up 81% of all U.S. small businesses, generating $1.2 trillion in annual sales. But are they succeeding financially?

Report on Nonemployer Firms Based on the 2017 Small Business Credit Survey

Nonemployer firms1 are important to the United States' economy, comprising 81% of all small businesses,2 employing 17% of the American workforce,3 and generating $1.2 trillion in annual sales.4 While previous research has explored why individuals seek self-employment5 or what conditions drive nonemployers to become employer firms,6 less is understood about the financial experiences and challenges of nonemployers—namely, whether or not nonemployers are succeeding financially.

The Small Business Credit Survey (SBCS), a national collaboration of the 12 Federal Reserve Banks, provides an opportunity to fill this information gap on nonemployer firms.7 Fielded in Q3 and Q4 2017, the survey yielded 5,547 responses from nonemployer firms, businesses in the 50 states and the District of Columbia that have no full- or part-time employees. This report provides an in-depth look at these firms' needs, decisions, and outcomes.

The 2017 survey data revealed nonemployer firms are performing positively overall despite notable financial challenges, especially for particular segments of firms. This executive summary highlights the key findings for nonemployer firms overall and for five subgroups of nonemployers.

Summary Findings for All Nonemployer Firms

Nonemployer Firms Are Unique From Employers in Key Ways

  • Nonemployer firms are small: 71% have $100,000 or less in annual revenue, compared to 18% of employer firms.
  • Although, on average, nonemployer firms are younger than employer firms, more than half of nonemployers are more than four years old.
  • Compared with employer firms, nonemployers exhibit less financial strength. On net, 8% of nonemployers report they operate at a profit, while among employers, a net share of 31% are profitable. Furthermore, nonemployers are more likely to rely on their owners' personal finances to fund their operations (41% of nonemployers compared to 19% of employers).
  • Several characteristics of nonemployers illustrate the unique nature of these firms: 69% operate out of a home, 36% use their business for supplemental income, 39% are independent contractors, and 22% started their business when they lacked other employment options.

Shared Work and Employment Aspirations

  • Slightly more nonemployers (44%) hire contract workers, compared to the share of employer firms (39%).
  • More than 1 in 4 nonemployer firms plan to add employees in the next 12 months.

Performance and Growth Expectations Vary by Revenue Size

  • A net 8% of nonemployer firms were profitable, driven mainly by very high profitability among larger-revenue firms:8 a net 50% of larger-revenue firms were profitable, compared to a net -8% of smaller-revenue firms.
  • Nonemployers overall have positive expectations for future revenue and employment growth. Smaller-revenue nonemployers are somewhat more optimistic about their future revenue growth than larger-revenue firms.

Financial Challenges

  • Nonemployer firms cited paying operating expenses and accessing credit as their top financial challenges.
  • Nearly three-quarters (74%) of nonemployer firms with financial challenges used personal funds to address the challenges.

Constrained Borrowing Opportunities

  • Only one-quarter of nonemployer firms applied for financing. Of those that did not apply, 39% reported they have sufficient financing, and 31% were averse to taking on debt.
  • Among applicants, 34% were approved for the full amount of financing sought. Two-thirds reported receiving less than the amount they applied for.
  • Low credit scores and insufficient credit history are top barriers to nonemployer financing, particularly for smaller-revenue firms.
  • Owners' personal creditworthiness is important for nonemployer firms. Personal guarantees and personal assets are the most frequently used collateral for acquiring debt, and 65% of credit card holders use a personal credit card for business financing.

Debt Holdings

  • Among nonemployers that have taken on debt, most have borrowed $25,000 or less, though larger-revenue firms are more likely to borrow larger sums.
  • Credit cards are the most commonly held financing product among nonemployer firms, with 45% reporting that they use credit cards regularly. Loans and lines of credit are also popular among larger-revenue nonemployers.
Summary Findings for Five Types of Nonemployer Firms, Categorized by Nature of Work

The sheer size of the nonemployer firm sector implies the diverse nature of work in which these firms are engaged. Indeed, nonemployer firms can include gig workers, startups that are planning to hire employees, and mature businesses that rely on contract workers as their workforce, among others. A key feature of this report is a deep dive into five different categories of nonemployer firms based on the nature of their work.9

  • Supplemental Work: firms for which the business is not the owner's primary source of income and the owner has no plans to hire employees. These are 26 percent of nonemployers.
  • Contract Work: firms working as independent contractors or 1099 workers, where the business is the owner's primary source of income, and the owner has no plans to hire employees. Of nonemployers, 20 percent are contract-work firms.
  • Stable Nonemployer: firms where the business is the owner's primary source of income and the owner has no plans to hire employees. These firms do not work as independent contractors or 1099 workers. These firms comprise 25 percent of nonemployers.
  • Early-Stage Potential Employer: new firms, in business two years or less, planning to add employees in the next 12 months. These firms account for 13 percent of nonemployers.
  • Later-Stage Potential Employer: firms that have been in business more than two years that plan to add employees in the next 12 months. These are 15 percent of nonemployers.

Categories of Nonemployer Firms Differ in Demographics and Performance

  • Potential employers, and in particular early-stage potential employers, are more likely to be owned by someone younger than 46 or from a racial or ethnic minority group. Despite planning to hire employees in the future, potential employer firms are more likely to be higher credit risk and are more likely to report financial challenges (such as difficulty paying operating expenses or accessing credit).
  • Contract work firms are most likely to have started because the owner lacked other employment options.
  • Stable nonemployers tend to be more established firms, have higher revenues, and are least likely to seek funds for expansion. When stable nonemployers apply for financing, the reason is often to pay operating expenses.
  • Most stable nonemployers and contract work firms were profitable in 2016, compared to only 34% of supplemental work firms and 23% of early-stage potential employers.
  • While supplemental work firms have low rates of profitability, they also have the lowest levels of outstanding debt and the best credit risk profiles of all nonemployer groups.

Nonemployer Segments Cite Divergent Financial Needs and Funding Success

  • Potential employers are more likely than the others to seek financing, and they often report they sought funding to expand their business. Among both early- and later-stage potential employers, 32% applied for financing, compared to only 18% of supplemental work firms and 20% of contract work firms.
  • Of all nonemployers, potential employers are most likely to have potentially unmet funding needs. More than half of potential employers either were not funded for the full amount needed, or they chose not to apply even though they may have needed funds. Only one-quarter of all potential employers have had their funding needs met, compared to more than 40% for all other nonemployers.
  • Supplemental work firms are the least likely to apply for financing, but those that do apply have the highest rate of success among all nonemployer segments, despite only one-third reporting that they are profitable.
  • In contrast, later-stage potential employers have the highest application rate but the lowest rate of successfully securing funds.


1 In this report, we define nonemployers as firms without full-time or part-time workers on payroll. These firms may have more than one owner working for the business. Forty-four percent of nonemployers employ contract workers.

2 Based on authors’ calculations from U.S. Census Bureau’s Statistics of U.S. Businesses and Nonemployer Statistics. 2015.

3 Jeff Larrimore et al. Report on the Economic Well-Being of U.S. Households in 2017. Consumer and Community Development Research Section. Federal Reserve Board Division of Consumer and Community Affairs, May 2018.

4 U.S. Census Bureau, Nonemployer Statistics, 2016.

5 See Hamilton, Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment. 2000; Acs, Headd, and Agwara. Nonemployer Start-Up Puzzle. 2009; Simoes, Moreira, and Crespo. Individual Determinants of Self-Employment Entry – What do we Really Know? 2013; Patrick, Stephens, and Weinstein. Where Are All the Self-Employed Women? Push and Pull Factors Influencing Female Labor Market Decisions. 2016; Fisher and Lewin. Push and Pull Factors and Hispanic Self-Employment in the USA. 2018.

6 Davis at al. Measuring the Dynamics of Young and Small Businesses: Integrating the Employer and Nonemployer Universes. 2007; Fairlie and Miranda, Taking the Leap: The Determinants of Entrepreneurs Hiring their First Employee. 2016.

7 For more information about the Small Business Credit Survey, visit https://www.fedsmallbusiness.org/.

8 Nonemployer firms with more than $100,000 in annual revenues are 28% of all nonemployer firms.

9 See p. 19 for detailed definitions of these groups.





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