Young, small and minority-owned companies more likely to report shortfalls
By William Morris
BridgeTower Media Newswires
MINNEAPOLIS, MN — A new report finds that 46 percent of small businesses with at least one employee that applied for credit in 2017 received the full amount they sought, an increase from 40 percent the year before.
The Small Business Credit Survey is conducted by the 12 Federal Reserve Banks to identify obstacles to small businesses’ growth and success and especially in their access to credit. The survey released Tuesday found the number of companies applying for financing actually declined from 45 percent in 2016 to 40 percent in 2017 and 59 percent of those requests were to expand a business or pursue a new opportunity. The survey included more than 8,100 companies.
In a press call to discuss the findings, bank officials said previous years saw more companies seeking financing to cover operating expenses, suggesting that more companies are now profitable and even looking to expand.
“We find that small businesses are more optimistic than they have been the past two years,” said one Federal Reserve official who worked on the report. “In terms of firms’ experience in the credit market, we’re seeing a reduced demand for financing. … [and] firms are more often seeking financing for expansion.”
In an article released along with the report, New York Federal Reserve Bank President William Dudley wrote that small companies with between one and 499 employees account for more than 60 percent of net new private-sector jobs.
“Small businesses are also critical to local economies in both urban hubs and rural communities, and they play a key role in empowering minority and at-risk populations,” he said. “Today’s Employer Firms Report shows that 18 percent of employer small businesses are minority-owned, and 20 percent are women-owned … and these shares have grown in recent years.”
The report shows gaps remain for companies in need of financing. Younger, smaller and minority-owned companies were more likely to report shortfalls, as were those that said they had poor credit histories. In response to financial challenges, 67 percent of companies report dipping into owners’ personal accounts, and 87 percent rely entirely or in part on the owners’ personal credit score when seeking financing.
The report found signs of strength in the Ninth District, which includes Minnesota, Montana, the Dakotas and parts of Wisconsin and Michigan. Businesses reported net employment growth of 26 percent in the previous 12 months compared with the 18 percent reported by the country as a whole. The Ninth District also outperformed the national results in net profitability, 35 percent to 31 percent, and revenue growth, 29 percent to 26 percent.
The most common forms of small business financing are loans or lines of credit, followed by credit cards. One advantage for Ninth District businesses seeking financing is the large number of willing lenders. The report found that 66 percent of the companies seeking financing applied to small banks, compared with 47 percent nationally.
Mike Ryan, director of the Small Business Development Center at the University of St. Thomas, works with small companies to obtain financing. He said Minnesota in particular offers a favorable lending environment for small businesses.
“Credit is pretty good right now,” Ryan said. “There’s a lot of bankable businesses, so there’s a lot of competition among the banks when there’s a good borrower. Minnesota has a really high number of small banks, community banks that are friendly to small business clients that we work with.”
At the local level, Ryan said he sees the same trends observed in the Fed report.
“It’s growth challenges [facing companies] more than a survival issue that we went through a number of years ago,” he said. “We’re seeing a lot of optimism now. … The indications are really good from our perspective.”
One trend tracked by the Federal Reserve Bank system is the rise of non-bank online lenders such as OnDeck. The report notes 24 percent of companies seeking financing applied to such companies, up from 21 percent in 2016. Net satisfaction with such loans rose from 19 percent to 35 percent, although that’s well behind satisfaction at large and small banks.
Fed officials said online lenders offer faster decision-making and are often more likely to approve loans for companies with poor credit or limited collateral. Ryan said some of the companies he works with have looked into online lending, but said the downsides often outweigh the benefits.
“We’ve had a number of people look into that, but when you really dig into it, that lending is extremely expensive,” he said. “Really, the traditional lending is much preferable if you can get that.”
A follow-up report examining responses from self-employed and sole proprietor companies will be published this summer.
