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Survey Sheds Light on Small-Business Experiences

Federal Reserve Banks asked, and more than 5,000 answered: A majority of small employer firms reported they were operating profitably and were able to secure financing.

Small employer firms, or those that have at least one employee and no more than 500 in addition to the owner, had positive things to say about recent profitability and revenue growth, and they expressed optimism for the year to come, according to the 2015 Small Business Credit Survey: Report on Employer Firms released in March 2016.

The Small Business Credit Survey (SBCS), on which the report on employer firms is based, was conducted by the Federal Reserve Banks of Cleveland, Atlanta, Boston, New York, Philadelphia, Richmond, and St. Louis.

These findings suggest some strengthening in small businesses’ collective financial condition.

Seventy-four percent of those in the employer firm sample have fewer than 10 employees, and 70 percent have annual revenues of $1 million or less. Respondents represent a range of industries including professional services, retail, healthcare, and manufacturing. Notably, the 2015 SBCS sample includes a significant number of newer firms: 21 percent of the employer firms have operated for 2 or fewer years.

The report, which analyzes the fall 2015 responses given by more than 3,400 employer businesses, reveals that the majority of respondents reported favorably on their companies’ financial standing, as 55 percent said their companies were operating profitably, and 54 percent said revenues had increased in the previous 12 months. Thirty-four percent of respondents reported their firms added employees.

While business owners shared positive sentiments about the previous 12 months, they were even more optimistic about the coming year: 72 percent said they expect their revenues to increase, and 45 percent planned to hire additional employees.

But the reality is that small firms often face barriers to planned growth in addition to their day-to-day challenges. The foremost challenges reported by respondents included cash flow and the costs of running the business. Others reported concerns with hiring or retaining qualified staff.

The growth in the SBCS coverage area from 10 states in 2014 to 26 states in 2015 and adjustments to the questionnaire necessitate caution when comparing survey results from both years. That said, a look at only the employer firms in those states surveyed in both 2014 and 2015 shows that a higher share of 2015 respondents are operating profitably, 27 percent as compared to 15 percent in 2014. A higher share also reported growth in both revenues and employment. These findings suggest some strengthening in small businesses’ collective financial condition.

Credit outcomes

Among employer firms responding to the survey, 47 percent indicated they had applied for financing in the previous 12 months. Sixty-one percent of applicants said they sought to borrow in order to fund expansion of their business or to pursue a new opportunity. Others applied for funding to cover operating expenses or to refinance existing debt.

In total, 82 percent of employer firms that applied for credit in the 12 months prior to taking the survey were approved for at least some financing, and 50 percent received the full amount of funding they sought. A comparison of the 2014 and 2015 SBCS responses suggests a positive trend. An analysis of the employer firms in only those states surveyed in both years reveals that approval rates were, in fact, higher in 2015, as 38 percent of this group was fully funded in 2014 compared to 45 percent in 2015.

Applicants reported the greatest success being approved for credit with small banks and online lenders, with 76 percent of applicants at small banks receiving at least some of the financing they sought. At online lenders—defined as nonbank alternative and marketplace lenders—applicants reported a 71 percent approval rate.

Where 50 percent of applicants were approved for all of the financing they sought, the other 50 percent were approved for either less than the amount applied for or no funding at all. These financing shortfalls were most common among smaller firms.

Where 50 percent of applicants were approved for all of the financing they sought, the other 50 percent were approved for either less than the amount applied for or no funding at all.

When asked about the impact of their financing shortfalls, respondents who reported they were approved for less than the financing amounts they sought said they would either be unable to meet all of their expenses or they would have to delay plans for expansion. Owners of new and growing firms reported they would dip into their own personal funds to finance their operations.

While the 2015 Small Business Credit Survey: Report on Employer Firms details the responses of firms with employees, future analyses will dive deeper into the data and insights regarding the self-employed and other subsets of respondents.

Sum and substance: Results of the 2015 Small Business Credit Survey reveal that many of the small employer firms surveyed were successful in securing some or all of the credit they sought.

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The 2015 Small Business Credit Survey: Report on Employer Firms reveals what small-business owners say about credit conditions, but what do bankers and Cleveland Fed bank examiners observe? Forefront shares their insights.

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