Small Employer Firms Reveal More Optimism and Success, Though Financial Challenges Persist for Some

For immediate release

Contact: Joey Lee, Media Relations, 215-574-3840

The 12 Federal Reserve Banks today issued the 2017 Small Business Credit Survey: Report on Employer Firms, which examines the results of an annual survey of small business owners nationwide. The Report focuses on small employer firms, businesses that have between 1-499 full or part-time employees (hereafter “firms”). It builds on the Reserve Banks’ new website FedSmallBusiness.org, which serves as a hub for small business research and analysis.

The Report found that firms’ profitability, revenue growth, and employment growth improved, and optimism about future performance reached its highest level in several years. More firms received all of the financing requested, and a significant portion did not apply for credit because they already had sufficient financing. However, despite this success, smaller firms, start-ups, and those in the leisure & hospitality industry continued to struggle acutely with financing challenges.

Key findings can be found in the Report on Employer Firms’ executive summary. These findings include:

Performance and Expectations

• The share of firms reporting profitability, revenue growth and employment growth, all increased from the 2016 survey.
• Optimism about the coming year reached its highest level since 2015, with a net 66% of firms anticipating revenue growth and a net 44% expecting to hire new employees.

Financing Demand, Approvals, and Sources

• Fewer firms applied for financing, and half of the nonapplicants did not apply because they already had sufficient financing.
• A larger share of applicants received the full amount of financing requested (46% versus 40% in 2016).
• Applicants sought financing most frequently at large banks (48%), small banks (47%) and online lenders (24%).
• Applicants had the most success at community development financial institutions (88% approval rate) and online lenders (75% approval rate). Of note, applications to online lenders increased, but firms were the least satisfied with them.

Financial Challenges and Reliance on Personal Finances

• Even with this stronger performance, greater optimism, and reduced applications for financing, 64% of firms experienced financial challenges.
• These challenges were particularly acute for start-ups, those with smaller annual revenues, and those in the leisure & hospitality industry.
• Firms most often addressed financial challenges by using personal funds (67%).

Philadelphia Fed’s District (Third District – DE, NJ, PA)

Third District

• More Third District firms exhibited risk factors compared with firms nationwide.
  • 31% of Third District firms were a medium credit risk (versus 25% nationally), and 7% were a high credit risk (versus 6% nationally).
  • 71% of Third District firms had outstanding debt compared with 68% nationally.
  • Many Third District firms experienced the financial challenges of making payments on debt (30% versus 25% nationally), paying operating expenses (42% compared with 40% nationally), and credit availability (32% compared with 30% nationally), similar to national averages.
• Relative to nationwide averages, higher percentages of Third District firms sought financing for expansion or replacing capital assets.
  • 71% of Third District applicant firms sought financing to expand, pursue new business, or replace capital assets (versus 59% nationally).
• Third District firms were less likely to report employment growth over the past 12 months, with a net 14% reporting employment growth (versus 19% nationally).
• Compared with national averages, a higher percentage of Third District firms were owned by men, owned by nonminorities, and located in urban areas.
  • 70% of Third District firms were owned by men (versus 65% nationally), and 11% were equally owned by men and women (versus 15% nationally).
  • 84% of Third District firms were owned by nonminorities compared with 82% nationally; 91% of Third District firms were located in an urban geography (versus 83% nationally).

Pennsylvania

• More Pennsylvania firms exhibited risk factors compared with firms nationwide.
  • 31% of Pennsylvania firms were a medium credit risk (versus 25% nationally) and 9% were a high credit risk (versus 6% nationally).
  • 72% of Pennsylvania firms had outstanding debt compared with 68% nationally. Pennsylvania firms experienced financial challenges, including difficulty making payments on debt (29% compared with 25% nationally) and credit availability (33% compared with 30% nationally).
• 25% of Pennsylvania firms were growing, compared with 29% nationwide. Firms in Pennsylvania also reported net increases in employment of 12% (versus 19% nationally).
• A higher percentage of Pennsylvania firms were owned by men (71% versus 65% nationally) and nonminorities (90% versus 82% nationally) compared with national averages.
• A similar percentage of Pennsylvania firms sought financing as firms nationally (42% versus 40% nationally), and these applicants also had similar approval rates.
  • 58% of Pennsylvania firms applied for credit at large banks (versus 48% nationally) and 9% applied at community development financial institutions (CDFIs) (versus 5% nationally).
  • Large banks were reported to be the largest source of credit for firms that both applied and did not apply for new products in the past 12 months.
  • 71% of Pennsylvania firms sought financing to expand, pursue new business, or replace capital assets (versus 59% nationally).

Additional reports on the 2017 Small Business Credit Survey will be released throughout 2018 at FedSmallBusiness.org. These will take an in-depth look into specific types of small businesses, including nonemployer firms, start-ups, and minority-owned firms.

About the Small Business Credit Survey (SBCS)

The SBCS collects information about business performance, financing needs, and choices and borrowing experiences of firms with fewer than 500 employees. Responses to the SBCS provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The results are weighted to reflect the full population of small businesses in the United States. The SBCS is not a random sample; therefore, results should be analyzed with awareness of potential methodological biases.

The SBCS includes experiences from firms across all 50 states and the District of Columbia through the joint efforts of the Federal Reserve Banks of Philadelphia, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Richmond, San Francisco and St. Louis. The 2017 SBCS collected 14,465 responses in total, 8,169 of which were from employer firms.