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Contact: Joey Lee, Media Relations, 215-574-3840
Federal Reserve Banks’ Small Business Report Finds Firm Performance Held Steady from Previous Year; New Supplemental Brief Explores Financial Resiliency of Small Firms Facing Sustained Revenue Shock
The 12 Federal Reserve Banks today issued the Small Business Credit Survey: 2020 Report on Employer Firms , which examines the findings of an annual survey of small business owners nationwide. The report focuses on small employer firms — businesses that have between one and 499 full- or part-time payroll employees (hereafter “firms”). The 2019 survey yielded more than 5,500 responses from firms in the 50 states and the District of Columbia.
As policymakers and service providers enact programs to help small businesses weather the COVID-19 outbreak, the report provides baseline estimates about small firms’ performance, financing and credit positions, and relationships with lending institutions prior to the onset of the crisis. To provide deeper insights into the financial health of small firms facing an economic shock, the Federal Reserve Bank of New York also released a supplemental brief that leverages data from the survey to gauge the financial resiliency of small firms.
“Small businesses nationwide now face unprecedented challenges as the country grapples with the significant economic and social effects of the COVID-19 pandemic,” said Claire Kramer Mills, assistant vice president at the New York Fed. “Utilizing pre-outbreak data on firms’ financial cushions and funding networks, the report and brief released today offer critical, baseline information to policymakers and stakeholders on the financial and operational challenges shared by small businesses. The data underscore that while small firms reported a strong end to 2019, many continued to deal with financial challenges, and even the healthiest of firms could face tough decisions amid a sustained loss in revenue. Furthermore, by shedding light on the channels through which firms may seek financial recourse, the data can inform the design of new loan and grant programs and offer insights on how to reach businesses in need.”
Fielded in the third and fourth quarters of 2019, the report finds that a majority of small employer firms experienced revenue growth in the previous year, while more than one-third also added employees to their payroll. However, nearly two-thirds of firms reported facing financial challenges in 2019, with more than one-fifth of firms experiencing a financing shortfall despite applying for funding. A majority of firms also reported having to use an owner’s personal savings or tapping their personal networks to support their business, while less than half had obtained funds from a bank in the last five years. Additionally, the supplemental brief released today suggests that even profitable firms with low credit risk may find it difficult to weather a sustained revenue shock using cash reserves alone.
Key findings can be found in the 2020 Report on Employer Firms’ executive summary. These findings include:
PERFORMANCE AND EXPECTATIONS
The supplemental brief published today —Can Small Firms Weather the Economic Effects of COVID-19 — draws on data from the Small Business Credit Survey to examine the financial resiliency of employer firms and their ability to weather the potential economic effects of the COVID-19 outbreak. The brief classifies firms into three categories based on profitability, credit risk, and business funding. “Healthy” firms are those that are profitable, have a high credit score (low credit risk), and primarily use retained earnings to fund the business. Firms that meet only two of these criteria are classified as “stable,” while those that meet only one are categorized as “at risk.” Firms that do not meet any of these criteria are classified as “distressed.”
Key findings from the brief include:
UNDERLYING FINANCIAL HEALTH
DEALING WITH FINANCIAL LOSS
About the Small Business Credit Survey (SBCS)
The SBCS collects information about business performance, financing needs and choices, and borrowing experiences of firms with fewer than 500 employees. Responses to the SBCS provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The results are weighted to reflect the full population of small businesses in the United States. The SBCS is not a random sample; therefore, results should be analyzed with awareness of potential methodological biases.
The SBCS includes experiences from firms across all 50 states and the District of Columbia through the joint efforts of the Federal Reserve Banks of New York, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, Philadelphia, Richmond, San Francisco, and St. Louis. The 2019 SBCS collected 9,534 responses in total, 5,514 of which were from employer firms.