The Small Business Credit Survey (SBCS), a national collaboration of the 12 Federal Reserve Banks, delivers timely information on small business financing needs, decisions, and outcomes to policymakers, lenders, and service providers. Fielded in Q3 and Q4 2018, the survey yielded 6,614 responses from small employer firms with 1–499 full- or part-time employees (hereafter "firms"), in the 50 states and the District of Columbia.1 In addition to the survey's established measures of business performance and credit outcomes, the 2019 Report on Employer Firms features a detailed look at firms that are adding payroll employees and firms that are facing financing gaps.
Strong End to 2018, Tempered Expectations for 2019
Small business respondents recounted a strong end to 2018. A majority of small businesses (57%) reported that their firms had experienced revenue growth and more than one-third added employees to their payrolls. The shares of firms with growing revenues and employment represent increases from the 2017 survey; however, the percentage of firms operating at a profit remained unchanged. Looking to 2019, a strong majority of firms expect revenue growth, but the net share of firms that anticipates adding payroll jobs in the next year dipped to 38% from 43% in the prior year's survey.
Steady Credit Demand, Growing Interest in Online Providers
On the financing front, credit demand held steady in 2018, with 43% of firms seeking external funds for their businesses. Similar to 2017, more than half of firms that sought new funding—53%—experienced a financing shortfall, meaning they obtained less funding than they sought. Applications to online lenders continued to trend upward: 32% of applicants turned to online lenders in 2018, up from 24% in 2017, and 19% in 2016. The growth occurred despite lower applicant satisfaction with online lenders compared to satisfaction levels with large and small banks.
Overall, the survey finds:
- A larger share of firms reported revenue growth (net 35%, up from 28%) and employment growth (net 23%, up from 19%) in 2018 compared to 2017, and 72% of firms expressed optimism for revenue growth in 2019—the same share as in the prior year.
- A vast majority of firms (73%) reported their input costs had increased in the prior 12 months. More than half of these firms raised the prices they charge. Firms that raised their prices were twice as likely to see profitability growth as firms that did not pass on cost increases.
- More than one-third of firms reported adding payroll employees in the prior 12 months. Payroll employment gains were most common at startups, firms with five or more employees, firms with more than $1M in annual revenues, and firms with decision makers younger than 46 years of age.
- The share of firms that expects to hire workers in 2019 (44%) is lower than the share of firms that anticipated employment growth in 2018 (48%). Consistent with prior years' findings, the expectations for growth exceeded actual growth for the period; the 37% of firms that added employees in 2018 fell short of the 48% share that said they had planned to hire in the 2017 survey.
- Year-over-year results showed consistent demand for new financing, with 43% of firms applying for new capital in 2018, in line with 40% in 2017.
- Nearly half of applicants (47%) received the full amount of funding sought, similar to the 2017 survey. Of those that did not apply, roughly half reported they had sufficient financing.
- Among all small businesses—applicants and nonapplicants—the SBCS finds that nearly half (48%) indicated their funding needs are satisfied, 23% have shortfalls, and another 29%, including debt-averse and discouraged firms, may have unmet funding needs.
- Financing shortfalls were particularly pronounced among firms with weak credit profiles, unprofitable firms, younger firms, and firms in urban areas. Funding gaps were most acute for firms seeking $100–$250K.
- Medium- and high-credit-risk applicants seeking loan or line of credit financing were as likely to apply to an online lender as to a large bank (54% and 50%, respectively), and more likely to apply to an online lender than to a small bank (41%), CDFI (5%), or credit union (12%). One in five medium- and high-risk applicants sought financing from other sources, including auto/equipment dealers, private investors, or government entities.