CHICAGO - (April 16, 2019)
Small Business Report Finds Strong Revenue and Employment Growth with Profitability Similar to Prior Year; Financing Demand Remained Constant with Requests to Online Lenders Notably Increasing
The 12 Federal Reserve Banks today issued the Small Business Credit Survey: 2019 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 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 Report showed that while revenue and employment growth both improved year over year, profitability remained the same. The outlook for 2019 is more tempered. While credit demand increased marginally in 2018, the number of firms receiving credit remained essentially flat. Firms with high credit risk and startups continued to have financing shortfalls. Online lenders in particular saw applications increase by approximately one-third, even though applicants were more dissatisfied with the interest rates offered.
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%) reported adding payroll employees in 2018.
- Employment gains were strongest at startups, firms with five or more employees, firms with more than $1M in annual revenues, and firms with younger decision makers (56 years of age or younger).
- A majority (73%) of firms saw input costs increase from 2017.
- Expectations for 2019 are mixed with a majority of firms expecting revenues to increase but the net share of firms expecting payroll job growth to decline.
Financial Challenges and Reliance on Personal Finances
- Nearly two-thirds of firms (64%) continued to experience financial challenges, including difficulties with managing operating expenses, scarcity of credit, and challenges making debt payments.
- Two-thirds (66%) of these firms relied on personal finances to cover their costs, while 40% of firms took out additional debt.
Financing Demand, Approvals and Sources
- Respondents showed consistent year-over-year demand for new financing, with 43% of firms applying for new capital in 2018, similar to 40% in 2017.
- Nearly half of applicants (47%) received funding for the full amount 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 in 2018 with 32% of firms applying to such lenders in 2018, up from 24% in 2017, and 19% in 2016. Borrowers chose online lenders mainly because of their speed to decision, the possibility of funding and, to a lesser extent, the lack of need for collateral. (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.”)
- More often, however, applicants went to lenders with whom they had existing relationships.
Additional analysis of the 2018 Small Business Credit Survey will be released throughout 2019 at FedSmallBusiness.org. The analysis will take an in-depth look into specific types of small businesses, including non-employer firms, minority-owned firms, and firms operating in low- and moderate-income communities.
Takeaways Specific to the Chicago Fed’s Region(the northern portions of Illinois and Indiana, southern Wisconsin, the lower peninsula of Michigan, and the state of Iowa):
- More than half of small businesses reported a profit in the past year both nationally and in the Seventh District (58% in the District and 57% nationally), and about the same number reported revenue growth year over year.
- Despite this revenue growth, the diffusion index for profitability (the difference between the percent reporting a profit and the percent reporting a loss) fell to 35 for our District from last year’s mark of 38.
- Employment rose in the past year for 37% of firms in the Seventh District and nationally, while only 15% of firms in the District and 14% nationally reported a decrease in employment. Taken together, these results suggest an increase in net employment growth for small businesses, both for the Seventh District and for the nation as a whole.
- Firms in Iowa led the Seventh District in profitability, with 66% reporting profitability and only 19% operating at a loss.
- Profitability increased significantly in Illinois and Indiana, with their profitability diffusion indices rising from 31 to 35 and 32 to 39 respectively.
- Profitability fell in Michigan, with the diffusion index dropping from 37 last year to 29 this year.
- In terms of financing, Indiana firms stand out as unusual in the Seventh District and nationally, with 15% of Indiana small firms seeking to raise capital via equity investment, while that statistic for the nation is only 6 percent. For the Seventh District as a whole, that statistic is 8 percent.
- Both Indiana and Iowa are somewhat unusual for the popularity and availability of small bank lending. Iowa leads the nation with 81% of small business loan applicants seeking financing from a small bank. The national norm is 44%. Indiana also exceeded the national norm, with 55% of small business loan applicants seeking financing from small banks.
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.
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Federal Reserve Bank of Chicago Background
The Federal Reserve Bank of Chicago is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the nation’s central bank. The Chicago Reserve Bank serves the seventh Federal Reserve District, which encompasses the northern portions of Illinois and Indiana, southern Wisconsin, the Lower Peninsula of Michigan, and the state of Iowa. In addition to participation in the formulation of monetary policy, each Reserve Bank supervises member banks and bank holding companies, provides financial services to depository institutions and the U.S. government, and monitors economic conditions in its District.