Fed: Non-Employer Firms Face Challenges with Credit Access, Operating Expenses

Fewer non-employer firms—those without full-time or part-time employees on payroll, which account for 81% of U.S. small businesses—reported profitability in 2018 than employer firms did, according to Small Business Credit Survey figures released today by the Federal Reserve Bank of New York. Forty-five percent of these businesses made a profit, while 21% broke even and 34% reported a loss. More than two-thirds said they expected revenues to grow in 2019.

The biggest financial challenges that non-employer firms reported were credit availability and paying operating expenses (29% each), servicing debt (23%) and purchasing inventory or supplies (18%). Just over a quarter of non-employer firms had applied for credit in the previous year, with 62% of these saying it was to expand or take on new work. Of those who did not apply, 42% said they had sufficient financing, 31% were debt-averse and 18% said they did not think they would be approved.

Small banks approved at least some of the amount requested for 43% of credit applicants, while large and regional banks approved credit for 42% of applicants—both figures smaller than rates for employer firms. Online lenders approved at least some credit for 60% of non-employer firms that applied. However, higher interest rates and unfavorable repayment terms drove lower satisfaction rates with online lenders (50%) compared to banks both large (59%) and small (68%).

The survey continued to show that for non-employer firms, personal credit histories were critical for securing financing; two-thirds used personal assets or guarantees to secure their debt. Sixty-nine percent said they used the owner’s personal credit score only in obtaining financing, and an additional 25% said that they used both personal and business scores.

The non-employer firms surveyed spanned a variety of business types. Three in 10 were side hustles not providing a primary income source, and nearly half were primary-income sole proprietors or contractors who planned to stay that way. About a quarter were firms with goals (near-term or longer-term) of growing and hiring. Potential employer firms were more likely to seek financing and to seek higher loan amounts.