SMALL BUSINESS
CREDIT SURVEY
2020 REPORT ON EMPLOYER FIRMS
Atlanta • Boston • Chicago • Cleveland • Dallas • Kansas City • Minneapolis
New York • Philadelphia • Richmond • St. Louis • San Francisco
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Small Business Financing and Credit Usage: 2020 Report, Lecture notes of Capstone Design
Insights from the Small Business Credit Survey conducted by the Federal Reserve Banks in 2020. The report covers various aspects of financing and credit usage by small businesses, including primary funding sources, demand for financing, financing received and shortfalls, and nonapplicants. It also includes data on demographics, industry sectors, and geographic locations.
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SMALL BUSINESS
CREDIT SURVEY
2020 REPORT ON EMPLOYER FIRMS
Atlanta • Boston • Chicago • Cleveland • Dallas • Kansas City • Minneapolis
New York • Philadelphia • Richmond • St. Louis • San Francisco
F E D E R A L R E S E R V E B A N K S o f
TABLE OF CONTENTS
14 APPLICATIONS
15 LOAN/LINE OF CREDIT SOURCES
17 LOAN/LINE OF CREDIT APPROVALS
19 LENDER CHALLENGES
20 APPLICANT SATISFACTION
21 NONAPPLICANTS
22 FINANCIAL CHALLENGES:
NONAPPLICANTS AND APPLICANTS
23 NONAPPLICANT USE OF
FINANCING AND CREDIT
24 NONAPPLICANT LOAN/LINE
OF CREDIT SOURCES
25 U.S. SMALL EMPLOYER FIRM
DEMOGRAPHICS
29 FACILITIES
31 METHODOLOGY
i ACKNOWLEDGMENTS
ii EXECUTIVE SUMMARY
1 PERFORMANCE
3 GROWTH EXPECTATIONS
4 GROWTH AMBITIONS
5 FINANCIAL CHALLENGES
6 FUNDING BUSINESS OPERATIONS
8 RELIANCE ON PERSONAL FINANCES
9 LENDING RELATIONSHIPS
10 DEMAND FOR FINANCING
11 FINANCING NEEDS AND OUTCOMES
12 FINANCING RECEIVED
13 FINANCING RECEIVED AND
SHORTFALLS
SMALL BUSINESS CREDIT SURVEY | 2020 REPORT O N EMPLOYER F IRMS ii
EXECUTIVE SUMMARY 1 U.S. Small Business Administration, “2018 Small Business Profile,” https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf_._ 2 The Small Business Credit Survey collects information from both employer and nonemployer firms. The 2019 survey yielded 4,020 responses from nonemployers.
The publication of this report comes at a
particularly challenging time for our nation’s
small business sector. Small businesses
across the country are grappling with the
profound impact of the COVID-19 pandemic
on their operations and on their owners’ and
employees’ livelihoods. As policymakers and
service providers begin to enact programs to
help firms weather the economic challenges,
insights about the financial position of small
businesses can provide a useful perspective
on how best to target funds and services.
The Federal Reserve Banks’ Small Business
Credit Survey (SBCS), fielded in Q3 and Q
of 2019, offers baseline data on the financ-
ing and credit positions of small firms before
the onset of the crisis. The survey findings
provide insights into firms’ preparedness
to withstand the shock, their existing debt
levels, and the actions they may take in
response to an unexpected loss of revenues.
Understanding that the potential effects of
COVID-19 are substantial and will vary by
type of business, accompanying this report
is a separate analysis that explores small
business resiliency. This supplemental brief,
Can Small Firms Weather the Economic
Effects of COVID-19? , is published concur-
rently with this report. A subsequent report
will provide results from nonemployer firms.
The results of the survey raise several
important considerations in the current
environment: most firms are ill prepared for
a sustained period of revenue loss; firms’
reliance on personal funds could mean
severe repercussions for those individuals
and households in the event of failure; and
many small businesses do not rely on
traditional banks for credit, and, therefore,
any program designed to support them
should take that into consideration.
SURVEY FINDINGS
The importance of small businesses to our
nation’s economy cannot be overstated.
Small employer firms, those with 1–
employees, account for 47.5% of the
private-sector workforce^1 and are vital to
the fabric of local communities. The SBCS
delivers timely information on small business
financing needs, decisions, and outcomes to
policymakers, lenders, and service providers.
The 2019 survey yielded 5,514 responses
from small employer firms with 1–499 full-
or part-time employees (hereafter “firms”), in
the 50 states and the District of Columbia.^2
Overall, the survey finds
Firm performance was relatively strong
prior to the pandemic.
Small business respondents reported
a strong end to 2019. A majority of small
businesses (56%) reported that their firms
had experienced revenue growth, and
more than one-third added employees
to their payrolls.
The shares of firms reporting revenue
growth, profitability, and employment
growth were all virtually unchanged
from 2018.
Profit margins were tightening for many.
Input costs increased for 76% of firms
over the prior year. Profit margins fell for
40% of firms. Of firms that reported higher
input costs, 61% raised the prices that
they charge.
Firms have common cash flow challenges,
and many rely on personal funds.
In the prior 12 months, 66% of employer
firms faced financial challenges; the
most common challenge was paying
operating expenses (43%).
If faced with a two-month revenue
loss, 86% of firms would need to take
some action to supplement funding
or cut expenses.
à The most common action (47% of
firms) would be to use the owner’s
personal funds.
à Another 17% of firms would have
to close.
à Among firms that applied for financing
in the prior 12 months, 46% would plan
to take out additional debt.
Owners’ personal finances remain deeply
intertwined with the finances of their
businesses, with 88% of firms relying on
an owner’s personal credit score to secure
financing. Additionally, 56% have used
funds from their personal savings, friends,
or family within the last five years to
support their business.
Debt holdings are common and typically
small dollar, and nearly half of recent credit
applicants have experienced funding gaps.
Forty percent of firms hold outstanding
debt in amounts up to $100,000. A majority
of firms used personal guarantees as
collateral to secure this debt.
Demand for new financing has been
steady, with 43% of firms applying for new
credit in 2019, in line with the 43% that
applied in 2018, and 40% in 2017.
Large and small banks remain small
firms’ top choices when applying for
credit, followed closely by online lenders;
having a relationship with a lender drives
many firms to apply to banks, but the
chances of being funded and speed of
credit decisions are top reasons firms
apply to an online lender.
Fifty-one percent of applicants received
the full amount of financing sought.
Of the firms that did not receive the full
amount, 20% indicated that the firm chose
to decline some or all of the approved
financing—most often because the
interest rate was too high.
SMALL BUSINESS CREDIT SURVEY | 2020 REPORT O N EMPLOYER F IRMS iii
EXECUTIVE SUMMARY (CONTINUED) 3 U.S. Census Bureau, County Business Patterns, 2017.
Though banks are the most broad-reaching
lending channel, many small businesses
do not use bank funding.
Less than half (44%) of small firms have
obtained funds from a bank in the last
five years. The most common source
of funding for firms overall was personal
savings or funds from friends or family.
Among firms that have obtained external
financing—outside of family or friend
networks—banks were the most common
channel (44% of firms), followed by online
lenders (22% of firms) and credit unions
(6% of firms).
The use of bank financing varies signifi-
cantly by race and ethnicity of owner, firm
revenue size, and credit risk, with highest
reported bank funding found among firms
with >$1M in annual revenues (57%), firms
with low credit risk (55%), and firms with
non-Hispanic white ownership (46%).
By contrast, firms with Non-Hispanic
black ownership are half as likely to
have obtained bank funds (23%), and
rates are similarly low among microbusi-
nesses (that is, $100,000 or less
in revenues)—24%—and those with
Latino ownership (34%).
ABOUT THE SURVEY
The SBCS is an annual survey of firms with
fewer than 500 employees. These types of
firms represent 99.8% of all employer estab-
lishments^3 in the United States. Respondents
are asked to report information about their
business performance, financing needs
and choices, and borrowing experiences.
Responses to the SBCS provide insights
on the dynamics behind lending trends and
shed light on noteworthy segments of the
small business population. The SBCS is not
a random sample; results should be analyzed
with awareness of potential biases that are
associated with convenience samples. For
detailed information about the survey design
and weighting methodology, please consult
the Methodology section.
Given the breadth of the 2019 survey data,
the SBCS can shed light on various segments
of the small business population, including
startups and growing firms, microbusiness-
es, minority-owned firms, women-owned
firms, firms located in low- and moderate-
income communities, and self-employed
individuals (nonemployer firms).
PERFORMANCE (CONTINUED) 1 Percentages may not sum to 100 due to rounding. 2 Approximately the second half of 2018 through the second half of 2019. 3 “Large” refers to a change of 4% or greater. “Small” refers to a nonzero change that is less than 4%. 76% of small firms saw their input costs increase over the prior year. 40% reported falling profit margins.
CHANGES IN COSTS, PRICES, AND PROFITABILITY,^1 Prior 12 Months^2
(% of employer firms)
Large increase^3
Small increase^3
No change
Small decrease^3
Large decrease^3
Change in cost
of labor/wages
N=5,
Change in
input costs
N=4,
Change in prices
the business
charges N=4,
Change in
profit margins
N=4,
2%^ 4%
Of firms that saw higher input costs, 61% raised the prices that they charge.
CHANGE IN PRICES CHARGED BY FIRMS WITH INCREASED INPUT COSTS N=3,
(% of employer firms with increased input costs)
39%
Did not raise prices
61%
Raised prices
GROWTH EXPECTATIONS 1 Expected change in approximately the second half of the surveyed year through the second half of the following year. 2 The index is the share reporting expected growth minus the share reporting a reduction. 3 Questions were asked separately, thus the number of observations may differ slightly between questions. The 2019 survey revealed that a majority of firms were anticipating revenue growth in the coming year, though the net share of firms expecting revenue growth declined relative to the 2018 survey.
EMPLOYER FIRM EXPECTATIONS, Next 12 Months^1 (% of employer firms)
EXPECTED REVENUE CHANGE N=4,967 EXPECTED EMPLOYMENT CHANGE N=5,
Will increase 69%
Will not change
Will decrease
Will increase 44%
Will not change 50%
Will decrease
EMPLOYER FIRM EXPECTATIONS INDICES,^2 Next 12 Months^1 (% of employer firms)
2016 Survey
N^3 =9,765–9,
2017 Survey
N^3 =7,736–8,
2018 Survey
N^3 =6,450–6,
2019 Survey
N^3 =4,967–5,
Revenue growth
expectations
Employment growth
expectations
FINANCIAL CHALLENGES 1 Approximately the second half of 2018 through the second half of 2019. 2 Respondents could select multiple options. 66% of employer firms faced financial challenges in the prior 12 months.^1
FINANCIAL CHALLENGES,^2 Prior 12 Months^1 N=6,
(% of employer firms)
17% of firms would have to close if they experienced a two-month revenue loss.
ACTIONS BUSINESS WOULD TAKE IN RESPONSE TO A 2-MONTH REVENUE LOSS^2 N=5,
(% of employer firms)
Use owner's personal funds
Take out debt
Reduce salaries of owner
or employees
Lay off employees
Downsize operations (reduce
hours, services, or production)
Defer expenses/payments
Close or sell the business
No action; use cash reserves
to continue normal operations
19% 8%
Purchasing
inventory
or supplies
to fulfill
contracts
30%
Making payments
on debt
33%
Securing
credit
43%
Paying operating expenses
(including wages)
34%
No financial
challenges
Other financial challenge
1 Percentages may not sum to 100 due to rounding. 2 Respondents could select multiple options. FUNDING BUSINESS OPERATIONS Loans, lines of credit, and credit cards are the most common types of external financing used by employer firms.
USE OF FINANCING AND CREDIT,^2 Products used on a regular basis (% of employer firms) N=5,
Loan or line of credit
Trade credit
Credit card
Leasing
Equity investment
Merchant cash advance
Factoring
Other
Business does not use
external financing
For 77% of firms, retained business earnings are the primary source of funding.
PRIMARY FUNDING SOURCE^1 (% of employer firms)
External financing
Personal funds
Retained business
earning
2016 Survey
N=9,
2017 Survey
N=8,
2019 Survey
N=5,
2018 Survey
N=6,
88% of employer firms rely on an owner’s personal credit score to obtain financing, similar to 2018.
USE OF PERSONAL AND BUSINESS CREDIT SCORES^1 (% of employer firms) N=3,
Business score only Owner’s personal score only Both business and personal scores
RELIANCE ON PERSONAL FINANCES 1 Percentages may not sum to 100 due to rounding. 2 Respondents could select multiple options. 3 Response option “other” not shown. See Appendix for details. 4 “Online lenders” are defined as nonbank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, Kabbage, and PayPal Working Capital. 5 “Finance company” includes nonbank lenders such as mortgage companies, equipment dealers, insurance companies, auto finance companies, etc. 6 Examples include payday lender, check cashing, pawn shop, money order/transmission service, etc. 7 Community development financial institutions (CDFIs) are financial institutions that provide credit and financial services to underserved markets and populations. CDFIs are certified by the CDFI Fund at the U.S. Department of the Treasury.
FUNDING SOURCES USED IN THE LAST FIVE YEARS2,3^ (% of employer firms) N=5,
Personal savings,
friends, or family
Nonprofit/community-
based funding source
Bank 44%
Alternative financial
source^6 3%
Online lender^4 20%
CDFI^7 1%
Finance company^5 9%
None 15%
Credit union 6%
56% of firms have relied on personal savings, friends, or family to fund their business in the last five years.
LENDING RELATIONSHIPS 44% of firms have used a bank for funding in the last five years, indicating a prior lending relationship. Banking relationships are more common among larger firms, firms with better credit scores, and firms with white ownership.
FUNDING SOURCES USED IN THE LAST FIVE YEARS, Select Sources (% of employer firms) N=5,
Bank 44%
Online 20%
lender
Credit 6%
union
FUNDING SOURCES USED IN THE LAST FIVE YEARS BY DEMOGRAPHIC CHARACTERISTICS,
Select Sources (% of employer firms)
Non-Hispanic white ownership N=3,
Low credit risk N=2,
Annual revenue of $100K–$1M N=1,
Annual revenue of $100K or less N=
Medium/high credit risk N=1,
Non-Hispanic Black ownership N=
Hispanic ownership N=
Annual revenue of >$1M N=2,
Bank
Online lender
Credit union
FINANCING NEEDS AND OUTCOMES 1 Based on the prior 12 months, which is approximately the second half of 2018 through the second half of 2019. 2 Discouraged firms are those that did not apply for financing because they believed they would be turned down.
FUNDING NEEDS AND OUTCOMES^1 (% of employer firms) N=5,
To gauge funding success and shortfalls, we combine applicants’ financing outcomes and nonapplicants’ reasons for not
applying. Firms that had their funding needs met emerge in two forms:
1) Applicant firms that received the full amount of financing sought; or
2) Nonapplicant firms that did not apply for financing because they already had sufficient financing.
The remaining firms may or may not have unmet funding needs. When applicant firms did not obtain the full amount of financing
sought, we consider them to have a funding shortfall. When nonapplicant firms did not report they had sufficient financings,
we consider them to have potentially unmet funding needs.
43% Applied for financing 9% 12% 22%
Received
none
Received
some
Received
all
57% Did not apply for financing 27% 14% 9% 7%
Sufficient
financing
Debt averse Discouraged^2 Other
21% Financing shortfall 49% Financing needs met 30% May have unmet financing needs
1 Respondents could select multiple options. 2 Credit risk is determined by the self-reported business credit score or personal credit score, depending on which is used to obtain financing for their business. If the firm uses both, the higher risk rating is used. “Low credit risk” is a 80–100 business credit score or 720+ personal credit score. “Medium credit risk” is a 50–79 business credit score or a 620–719 personal credit score. “High credit risk” is a 1–49 business credit score or a <620 personal credit score. FINANCING RECEIVED 51% of employer firms that applied for credit received all the financing they sought.
TOTAL FINANCING RECEIVED^1 (% of applicants)
All (100%)
Most (51%–99%)
Some (1%–50%)
None (0%)
2016 Survey
N=4,
2017 Survey
N=3,
2019 Survey
N=2,
2018 Survey
N=2,
47%^ 47%
Low-credit-risk applicants were more likely to obtain all the financing sought, compared to medium- or high-credit-risk applicants.
FINANCING RECEIVED BY CREDIT RISK OF FIRM^2 (% of applicants)
All (100%)
Most (51%–99%)
Some (1%–50%)
None (0%)
Low credit risk
N=
Medium credit risk
N=
High credit risk
N=
APPLICATIONS
FINANCING AND CREDIT PRODUCTS SOUGHT^1 (% of applicants) N=2,
Loan or line of credit 88%
Credit card 29%
Trade credit 10%
Merchant cash advance 9%
Leasing 9%
Equity investment 5%
Factoring 4%
Other 1%
APPLICATION RATE FOR LOANS/LINES OF CREDIT^1 (% of loan/line of credit applicants) N=1,
Business loan 49%
Business line of credit 40%
SBA loan 20%
Auto/equipment loan 14%
Personal loan 10%
Mortgage 5%
Home equity line of credit 8%
Other product 10%
1 Respondents could select multiple options. Applicants were most often seeking loans or lines of credit.
LOAN/LINE OF CREDIT SOURCES Large and small banks receive the most credit applications from small firms. Medium/high-credit-risk applicants, however, were more inclined to apply to online lenders.
CREDIT SOURCES APPLIED TO1,2,3^ (% of loan/line of credit and cash advance applicants) N=1,
CREDIT SOURCES APPLIED TO BY CREDIT RISK OF FIRM1,2,4^ (% of loan/line of credit and cash advance applicants)
Low credit risk N=861 Medium/high credit risk N=
Large bank^5 Small bank Online lender^6 Finance company^7 Credit union CDFI^8
Large bank^5 Small bank Online lender^6 Finance company^7 Credit union CDFI^8
1 Respondents could select multiple options. 2 Due to the addition of the “Finance company” option, source application rates are not comparable to those of previous survey years. 3 Respondents who selected “other” were asked to describe the source. They most frequently cited auto/equipment dealers, farm-lending institutions, friends/family/ owner, nonprofit organizations, private investors, and government entities. 4 Credit risk is determined by the self-reported business credit score or personal credit score, depending on which is used to obtain financing for their business. If the firm uses both, the higher risk rating is used. “Low credit risk” is a 80–100 business credit score or 720+ personal credit score. “Medium credit risk” is a 50–79 business credit score or a 620–719 personal credit score. “High credit risk” is a 1–49 business credit score or a <620 personal credit score. 5 Respondents were provided a list of large banks (those with at least $10B in total deposits) operating in their state. 6 “Online lenders” are defined as nonbank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, Kabbage, and PayPal Working Capital. 7 “Finance company” includes nonbank lenders such as mortgage companies, equipment dealers, insurance companies, auto finance companies, etc. 8 Community development financial institutions (CDFIs) are financial institutions that provide credit and financial services to underserved markets and populations. CDFIs are certified by the CDFI Fund at the U.S. Department of the Treasury.