The National Federation of Independent Business's (NFIB) small business optimism index surpassed 100 in December, a sign that small business' outlook on the economy has now reached "normal" long-run average levels. But that doesn't mean that everything is moonlight and roses for small firms. One question from the NFIB's survey (one that is not used in its overall optimism index) concerns a firm's ability to obtain credit. The survey asks, "During the last three months, was your firm able to satisfy its borrowing needs?" The chart below shows the net percent (those responding "yes" minus those saying "no") of firms reporting improving credit access.
The chart suggests that credit access has improved significantly since the end of the recession but that conditions still appear to be tougher than typical. Given the importance of small firms to employment growth, we at the Atlanta Fed have been particularly interested in monitoring financing conditions for small businesses. For this reason, we've conducted a regular survey of small businesses in the Southeast since 2010. In the fall of 2014, we joined forces with the New York, Philadelphia, and Cleveland Feds to expand and refine the small business data collection effort. The results of that survey are now available on our website and include downloadable data tabulations by different types of firms. Specifically, data are available by criteria including states, industries, firm size (in terms of revenue), and firm development stage.
Our previous small business surveys have focused on the experiences of young firms, so I found the new survey's tabulation by firm development stage of particular interest. For example, here's a summary of the experience of startups' ability to access financing markets versus that of mature firms.
First, what constitutes a startup? For comparison purposes, we draw the line (somewhat arbitrarily) at less than five years old. For mature firms, they not only have to be at least five years old, but they also must have at least 10 employees and hold some debt. When I picture a startup, I imagine a new restaurant owner purchasing tables and chairs, or a tech company manufacturing a prototype to market to potential investors. These types of firms are unproven and risky and tend to need relatively small amounts of money. Which begs the question: where are they going to get funds they need to grow? Before answering that question, let's examine the recent business performance of startups in the survey. About half of startups operated at a loss during the previous 12 months, but only about 20 percent had shrinking revenues. Most were either increasing the size of their workforce or had the same number of employees as a year ago. The top challenge reported by these young businesses was nearly tied between "difficulty attracting customers" (reported by 27 percent of firms) and "lack of credit availability" (reported by 26 percent of firms).
So how do those behind startups fund their businesses? In 2013, nearly half relied primarily on personal savings, whereas about 18 percent primarily used retained business earnings. Without a solid revenue history to prove their creditworthiness, financing was understandably difficult to come by. Only about 38 percent of startups received at least some financing, compared with 93 percent of mature firms. Many startups assumed it would be a fruitless endeavor—about one-fifth of them assumed they would be turned down, the cost would be too high, or the search would be too time consuming. The number of people who sought financing was about equal to those who were discouraged, and most were seeking less than $250,000.
Where did they apply? Their search was much broader than used by their counterparts at mature firms. Although both types of firms sought mostly loans and lines of credit, applications for products backed by the Small Business Administration, credit cards, and equity investments were notably higher for younger firms compared to mature firms. When it came to loans and lines of credit, there were large differences not only in what types of insitutions they submitted applications to, but also where they were most successful. Startups were mostly likely to apply at large regional and large national banks, but their approval rates were higher with smaller banks and online lenders (see the table).
The differences between young firms and mature ones is only one way to look at the data. The full report details variations by firm size, industry, and state. For more on general business and finance conditions of small firms, visit the small business trends dashboard.
By Ellie Terry, an economic policy analysis specialist in the Atlanta Fed's research department