Fed Survey: Most Small Businesses Lack Cash Reserves to Cover Long-Term Revenue Loss

Seventeen percent of small businesses said that they would have to close down or sell if they experienced two-month loss in revenue, according to the latest Small Business Credit Survey released today by the Federal Reserve Bank of New York. The survey, which was based on responses collected in the third and fourth quarter of 2019, prior to the outbreak of the coronavirus in the U.S., serves as a benchmark for how these firms entered the crisis period and highlights the challenges many were already facing.

Nearly half (47%) of the small business employer firms surveyed said they would use personal funds to float their business through a rough period. They also said they would reduce salaries (37%) take out additional debt (34%), lay off employees (33%), downsize operations (30%) or defer expenses or payments (29%). Just 14% said they would be able to continue normal operations using their cash reserves.

The survey also found that a majority of firms—66%—were facing some type of financial challenge even before the coronavirus pandemic began. Paying operating expenses—including wages—was a challenge for 43% of employer firms, while a third said they were having difficulties securing credit. Thirty percent were struggling to make payments on existing debt, while 19% faced challenges purchasing inventory or supplies to fulfill contracts.

The share of firms that applied for financing remained flat at 43% between 2018 and 2019 and the majority of firms applying during that time (56%) did so in order to expand their business, pursue a new opportunity or acquire business assets. Forty-three percent sought financing to meet operating expenses prior to the coronavirus outbreak.

Large banks received the most credit applications from small businesses (40%) during the survey period, followed by small banks (36%), online lenders (33%), finance companies (18%), credit unions (9%) and CDFIs (3%). Lender satisfaction was highest at small banks (79%), followed by large banks (66%), finance companies (63%) and online lenders (54%).