Small employer firms say revenues and hiring were stronger for 2018, though 2019 outlook is more tempered
Minneapolis, April 16, 2019— The 12 Federal Reserve Banks today issued the Small Business Credit Survey: 2019 Report on Employer Firms, which examines the findings of an annual survey of small business owners nationwide. The Report focuses on small employer firms, businesses that have between one and 499 full- or part-time payroll employees (hereafter “firms”). It is the latest addition to the Reserve Banks’ hub for small business research and analysis, FedSmallBusiness.org.
Fielded in the third and fourth quarters of 2018, the survey finds that while both revenue and employment growth improved from 2017, the share of firms that is profitable remained the same. The outlook for 2019 is more tempered. While credit demand increased marginally in 2018, the share of firms receiving credit remained essentially flat. Startup firms and firms with high credit risk continued to have financing shortfalls. Online lenders1 in particular saw applications increase by approximately one-third from the prior year, even though applicants remained dissatisfied with the interest rates and terms offered, relative to traditional lenders.
Key findings can be found in the 2019 Report on Employer Firms’ executive summary. These findings include:
Performance and expectations
- The share of firms reporting revenue and employment growth increased from 2017, but the share of firms operating at a profit remained flat.
- More than one-third of small firms (37 percent) added payroll employees in 2018.
- Employment gains were strongest among startups, firms with five or more employees, firms with more than $1M in annual revenues, and firms with younger decision makers (46 years of age or younger).
- A majority of firms (73 percent) saw input costs increase in the prior 12 months.
- Expectations for 2019 are mixed with a majority of firms (72 percent) expecting revenues to increase but 44 percent planning to add employees.
Financial challenges and reliance on personal finances
- Nearly two-thirds of firms (64 percent) continued to experience financial challenges, including difficulties with managing operating expenses, scarcity of credit, and challenges making debt payments.
- Two-thirds of these firms (66 percent) relied on personal finances to cover their costs, while 40 percent of firms took out additional debt.
Financing demand, approvals and sources
- Respondents showed consistent year-over-year demand for new financing, with 43 percent of firms applying for new capital in 2018, similar to 40 percent in 2017.
- Nearly half of applicants (47 percent) received the full amount of funding they requested, similar to the 2017 survey.
- Financing shortfalls were particularly pronounced among firms with weak credit profiles, unprofitable firms, younger firms, and firms in urban areas.
- Applications to online lenders continued their growth trend with 32 percent of applicant firms turning to such lenders in 2018, up from 24 percent in 2017, and 19 percent in 2016. These applicants expected online lenders would make faster funding decisions, would be more likely to provide funding, and would not require collateral.
- Applicants who sought funding at large and small banks cited an existing relationship as the primary factor in their choice of lender.
Additional analyses from the 2018 Small Business Credit Survey will be released throughout 2019 at FedSmallBusiness.org. Future releases will take an in-depth look into specific types of small businesses, including nonemployer firms, minority-owned firms, and firms operating in low- and moderate-income communities.
Takeaways specific to Minneapolis Fed’s region
- Nearly 40 percent of Ninth District respondents—about the same share as in the previous survey—indicated that they experienced challenges in paying operating expenses (including wages) in the prior 12 months. However, of the 43 percent of Ninth District firms that applied for financing, the most-cited reason for applying was to expand the business and explore new opportunities. Meeting operating expenses came in second.
- Ninth District firms operated under relatively positive business conditions. However, 57 percent experienced a small increase in input costs versus 48 percent nationally. Only 9 percent of Ninth District respondents indicated that their profit margin significantly declined in the prior 12 months versus 11 percent nationally. The share of Ninth District firms indicating that they expect a net increase in revenue was 60 percent, which is on par with the national figure of 63 percent.
- Nearly two-thirds of Ninth District firms, or 62 percent, preferred loans or lines of credit over all other types of external financing compared with 55 percent of firms nationally. In addition, Ninth District firms were less likely to use large banks as loan sources (40 percent versus 49 percent nationally). Finally, only 23 percent of Ninth District firms ranked loan cost or interest rate as a factor that influences where they apply for financing compared with 29 percent of firms nationally.
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 New York, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, Philadelphia, Richmond, San Francisco and St. Louis. The 2018 SBCS collected 12,455 responses in total, 6,614 of which were from employer firms.
1 The survey questionnaire asks about a range of nonbank online providers, including retail/payments processors, peer-to-peer lenders, merchant cash advance lenders, and direct lenders. For purposes of topline findings, nonbank online lenders are grouped into one category, “online lenders.”
The Federal Reserve Bank of Minneapolis is one of 12 regional Reserve Banks that, with the Board of Governors in Washington, D.C., make up the Federal Reserve System, the nation’s central bank. The Federal Reserve Bank of Minneapolis is responsible for the Ninth Federal Reserve District, which includes Montana, North and South Dakota, Minnesota, northwestern Wisconsin and the Upper Peninsula of Michigan. The Federal Reserve Bank of Minneapolis participates in setting national monetary policy, supervises numerous banking organizations, and provides a variety of payments services to financial institutions and the U.S. government.