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Credit survey finds small businesses in prolonged crisis

Nearly one-third of surviving firms say they’re unlikely to continue operating without additional government aid

Minneapolis, February 3, 2021

Credit survey finds small businesses in prolonged crisis

The Small Business Credit Survey: 2021 Report on Employer Firms, issued today by the 12 Federal Reserve Banks, found that sales had not returned to prepandemic levels for almost 90 percent of small-business owners. Of those firms, nearly one-third said it would be very unlikely or somewhat unlikely that their firms could survive without government assistance until sales recovered.

The annual survey of small business owners, fielded in September and October of 2020, yielded 9,693 responses from a nationwide sample of small employer firms with anywhere from one to 499 employees. The data are for firms that were currently operating at the time of the survey; it does not include permanently closed businesses.

Findings specific to the Ninth District

  • The pandemic resulted in dislocation among small businesses. Across the Ninth District respondents, 23 percent of businesses had temporarily closed, 52 percent reduced operations, and 51 percent maintained operations with modifications. Among firms that temporarily closed, reduced, or modified operations, 60 percent pointed to reduction in demand for products and services, 53 percent to government mandates affecting their business, and 51 percent to the need to adapt to health/safety guidelines.
  • 71 percent of small businesses in the Ninth Federal Reserve District experienced at least one financial challenge, a lower share than the 80 percent of small businesses nationally that experienced financial challenges. Operating expenses was the most cited challenge, followed by making payment on debts and paying rent.
  • The majority (80 percent) of Ninth District firms applied for the Paycheck Protection Program emergency fund. Of those who applied, 94 percent received at least some funding. Of the entrepreneurs who did not apply for the PPP emergency fund, 23 percent cited confusion with the application process as a reason, and 21 percent thought that they would not qualify for loan forgiveness. 92 percent of Ninth District PPP applicants had an existing relationship with large banks and 83 percent with small banks.
  • To deal with financial challenges, Ninth District firms used personal funds (68 percent) or cut staff (62 percent). Looking ahead, most firms expect weak demand for products/services (56 percent) and government mandated restrictions/closures (51 percent) to negatively impact their operations.

Among the key overall findings

  • Sales for 88 percent of small businesses have not returned to prepandemic levels. Of those firms, 30 percent said it would be unlikely, without government help, that the firm could survive until sales recovered.
  • The majority of firms, 64 percent, said they would apply for another round of government aid if it were offered. Of those firms, 39 percent expected that they would be unlikely to survive until sales returned to normal without further government assistance.
  • The report found stark differences by race and ethnicity. While 54 percent of firms overall characterized their financial condition as “fair” or “poor,” this figure jumped to 79 percent for Asian-owned firms, 77 percent for Black-owned firms, and 66 percent for Latinx-owned firms.
  • Black-owned firms said credit availability was the top expected challenge in the next 12 months.
  • Firms that applied for PPP funds were more likely to receive all the funds they sought from lenders where existing relationships were more common—small banks, large banks, and credit unions.
  • Among PPP applicants, firms that received funds were more likely than firms that did not receive funds to retain their workforce.

Performance and expectations

Almost every firm surveyed said the pandemic had impacted their business, with a majority expecting 2020 revenue to drop by more than one-quarter.

  • The share of firms that experienced financial challenges in the prior 12 months rose from 66 percent to 80 percent between 2019 and 2020.
  • 95 percent of firms reported that the pandemic impacted their business; 78 percent reported a decline in revenue, and 46 percent reduced their workforce.
  • 53 percent of firms expected total sales revenue for 2020 to decrease by more than 25 percent.
  • The net share of firms expecting employment growth was 14 percent compared with 38 percent in 2019. 37 percent of firms expect that the most important challenge stemming from the pandemic in the next 12 months will be weak demand, followed by government-mandated restrictions or closures (53 percent) and supply chain disruptions (37 percent).
  • Among the 80 percent of firms that experienced financial challenges in the prior 12 months, 62 percent used personal funds, while 55 percent cut staff hours/downsized operations.

Government assistance

Almost all of the small-employer firms surveyed applied for emergency funding. Those that received all they requested were less likely to reduce payroll and more likely to rehire laid-off employees than firms that did not receive all they requested.

  • 91 percent of firms applied for some type of emergency funding during the pandemic.
  • 82 percent of employer firms applied for PPP loans; 77 percent of PPP applicants received all the funding they sought.
  • Firms that sought PPP funds most frequently submitted their applications through small (48 percent) and large (43 percent) banks. Of firms that applied through large banks, 95 percent had an existing relationship with their bank prior to applying for a PPP loan. 83 percent of small bank applicants had an existing relationship.
  • While 46 percent of firms that received all the PPP funds they sought reduced the number of employees on their payroll, that figure increased to 71 percent for firms that received none of the PPP funding for which they applied. PPP recipients were also more likely to rehire employees they laid off once they received the funds.

Debt and access to credit

The number of firms carrying debt increased, as did those with a debt load of more than $100,000. Most owners whose firms experienced financial challenges in the prior 12 months used personal funds to help their businesses.

  • 79 percent of firms had debt outstanding, an increase from 71 percent in 2019.
  • The amount of debt firms held increased; the share of firms with more than $100,000 in debt rose from 31 percent in 2019 to 44 percent in 2020.
  • The share of applicant firms that received all the financing (excluding PPP and other emergency financing) they sought declined from 51 percent in 2019 to 37 percent in 2020.
  • 80 percent of firms reported that pandemic-related business challenges impacted the owners’ personal finances, with 63 percent not drawing or reducing their salary and 51 percent paying business expenses with their personal funds.
  • 42 percent of firms that applied for a loan, line of credit, or cash advance sought this funding from a large bank, a similar share as that in 2019 (40 percent). 43 percent turned to a small bank, up from 36 percent in 2019. In contrast, the share of firms that applied to an online lender fell from 33 percent in 2019 to 20 percent in 2020.
  • Firms with lower credit scores turned to online lenders (35 percent) and nonbank finance companies (23 percent) much more often than did their counterparts with higher credit scores (11 percent and 11 percent, respectively).

About the Small Business Credit Survey

The SBCS collects information about business performance, financing needs and choices, and borrowing experiences of firms with fewer than 500 employees. These firms represent 99.7 percent of all employers.

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. In addition to the 9,693 firms with employees included in the report, the 2020 survey yielded 4,531 responses from non-employer firms. These findings will be explored in a separate forthcoming report.