Fed Bank report shows small businesses face challenges
By Jeff McGaw
Faced with financial challenges, 76 percent of small businesses with employees used personal funds to plug holes in operating budgets rather than taking on new debt, according to a report released Tuesday by the nation's Federal Reserve Banks.
That was just one of the findings in the report, based on a the results of the annual Small Business Credit Survey.
According to the Fed, this was really the most detailed financial and credit information available on small businesses. The Fed indicates the banks are an unbiased source of such information.
While it is generally good advice to keep business and personal finances separate, the 76 percent figure showed what officials said was "the prevalence of personal credit and personal collateral and how widespread that is, and underscored the pervasiveness of financial challenges. It jived with a lot of other research coming out."
The survey touched on various segments of the small business world, including startups; growing firms; microbusinesses, or firms with 1-9 employees; minority- and women-owned firms; and self-employed or nonemployer firms.
Such firms represent 99.7 percent of all employer establishments in the U.S., according to the Federal Reserve.
While respondents are optimistic about their futures, 61 percent of employer firms faced financial challenges. Credit availability and meeting operating expenses are listed as the top two hurdles.
Most firms - 87 percent - rely on the owner's personal credit score to get financing. A total of 55 percent of loan applications were for amounts of less than $100,000, and 74 percent of all loan requests were for amounts less than $250,000.
Among those who did not apply for loans, 39 percent felt they would not be approved because of a low credit score. Smaller companies, defined as having less than $1 million in revenues, face tougher challenges, according to the survey. Those companies are more likely to use personal funds in times of need, generally have lower credit scores and are likely to receive a smaller share of financing that sought when compared to larger firms.
According to the survey, smaller firms apply for loans with large banks 49 percent of the time, and with small banks 42 percent of the time. However, they only succeed in getting loans from large banks 45 percent of the time.
They have a 60 percent success rate at smaller banks, and a 59 percent success rate with online lenders.
"Despite their outsized role in the U.S. economy, many small businesses lack the financing necessary to stabilize and grow their businesses," said New York Fed President William C. Dudley. "Supporting access to capital and effective financial management empowers small businesses to thrive in today's evolving economy, so that they can continue driving job growth and innovation."
Credit Unions and small banks provided a substantially higher level of customer satisfaction, at 75 percent, than did large banks who registered at 45 percent. Online lenders ranked lowest in customer satisfaction, according to the report.
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