Related Links

• Credit Checkup: A Look at the Financing Experiences of Small Businesses in Virginia, Washington, D.C., and North Carolina
• Small Business Credit Survey
• From Short-Term Relief to Long-Term Hardship: Some Small Businesses Struggle with Debt Burdens from COVID-19 Economic Injury Disaster Loans

Transcript

Tim Sablik: My guests today are Erika Bell and Emily Corcoran. Erika is the community development regional manager serving North and South Carolina, and Emily is the senior manager of regional and community analysis, both at the Richmond Fed. Erika and Emily, thanks for joining me.

Erika Bell: I'm excited to be here.

Emily Corcoran: Thanks for having us, Tim.

Sablik: Our topic today is credit access for small businesses. Since 2014, the Federal Reserve has conducted the annual Small Business Credit Survey, and we're going to be diving into the data and background of that survey today.

Emily, before you returned to the Richmond Fed earlier this year, you ran the Small Business Credit Survey out of the Federal Reserve Bank of Cleveland. Could you share a bit about the history of that survey?

Corcoran: As you mentioned, Tim, back in 2014 a number of community development researchers across the Federal Reserve System recognized a gap in the existing data on small businesses. Specifically, there was no demand-side measure to capture small business credit needs and experiences. We had no consistent mechanism to hear from small business owners themselves on their financing needs.

So, the Federal Reserve created one: the Small Business Credit Survey, or SBCS, is an annual national survey of small business owners. It asks about business conditions and credit needs and experiences over the past 12 months. For example, what financial and operational challenges did businesses experience? What percentage of businesses needed financing but chose not to apply for it? Of the businesses that did apply for financing, what share were approved? The data are incredibly rich and are collected through a survey that is open every fall to small business owners across the country.

Sablik: Erika, you regularly meet with business owners across North and South Carolina, and before you joined the Richmond Fed you led a small business yourself. Could you talk about the importance of access to credit from the perspective of small business owners? What financing options do they typically have?

Bell: Cash flow is an issue for many small businesses. The work has been performed and then they are left asking, "When will I get paid?"

A line of credit may ease this conundrum. A line of credit is a loan that gives you access to a set amount of money that you can borrow up to a certain credit limit and repay as needed.

The same is true for nonprofits, particularly those who are managing reimbursable grants. Imagine having an annual operating budget of $500,000, then receiving a $2 million commitment to a project in the form of a reimbursable grant, then having to spend much of the money up front and wait for repayment.

Capital for acquiring and upfitting operational space is also needed. This typically requires a commercial real estate loan.

Sablik: How does that landscape change during an economic downturn?

Bell: In economic downturns, you may see a rise in the need for working capital. This term refers to the resources available to run its day-to-day operations. Small businesses may rely on credit cards to make ends meet. You may also see small businesses hesitate when considering taking on a commercial real estate loan because they are unable or unwilling to take on the additional debt.

Findings released in 2024 based on the 2023 survey showed that 34 percent of firms reported that making payments on debt was a financial challenge. More than half of all firms — 54 percent — said that, at that time, higher interest rates were contributing to increased debt costs.

Sablik: How does the Fed use the data it collects from the Small Business Credit Survey? Do the findings factor into monetary policy decisions at all?

Corcoran: The Fed uses the survey data in a lot of different ways.

First and foremost, the survey team publishes reports and data products on fedsmallbusiness.org, including chart books that provide data on different segments of small businesses. We make this wealth of survey information public to help inform conversations about small business credit access. We want decision makers like national, state and local policymakers to understand business dynamics as they make policy decisions that impact small businesses. We want small business support organizations to use the data to inform how they design small business support programs. And, of course, we want small business owners themselves to know how they fit into the broader picture of business financing and credit access.

Within the [Federal Reserve] System, we do also use the data to inform our own policymakers and to help inform additional research on small businesses.

Bell: I'll add that I find that the chart books are a phenomenal resource. When I speak to audiences of bankers and small businesses, they devour the data and analysis. The chart books offer a wealth of information such as firm performance, financing — including financing applications and outcomes — and financial and operational challenges and actions taken in response.

Sablik: Thank you both for all that background information. Now we can turn to talking a little bit about the actual findings from the survey. What picture is the survey data painting for credit access right now?

Corcoran: The 2024 survey closed on November 1 and data will become available around March of next year. Good insights take time to produce. But in the meantime, we can look at the 2023 data to see where small businesses have been and where they may be heading.

The 2023 survey showed signs of further recovery and strengthening post-pandemic. Measures of firm performance remained elevated, well above pandemic-era lows and remained steady year over year, but they did lag pre-pandemic levels.

Small businesses continued to face operational and financial headwinds, as Erika mentioned. Firms experienced challenges with rising costs and paying operational expenses in the year leading up to the survey, which was fielded from September to November of 2023.

With respect to financing, the share of firms that applied for traditional financing declined slightly between 2022 and 2023. Approvals remained mostly steady. We saw that applicants at small banks, credit unions and finance companies were more likely to be approved for at least some financing than applicants at other sources.

Sablik: Have you looked at how states in the Fifth District compare to the country as a whole?

Corcoran: We have. In terms of credit access and experiences, small businesses in the Fifth District largely mirror national trends. Like I mentioned for small businesses nationally, Fifth District small businesses are largely on strong financial footing, although a portion are holding higher debt levels than we saw before the pandemic.

Interestingly, we did see some state-level differences in where small business owners applied for financing in the Fifth District. For example, small business owners in Virginia were more likely to apply through an online lender, while small business owners in North Carolina were more likely to apply to a large bank. That may speak to regional differences in the types of financial institutions by state or other financial access dynamics. It's meaningful because we do see different approval rates by source at the national level. So, access to different types of financial institutions can impact credit access.

Sablik: As you mentioned, it takes some time to get the latest survey data. Erika, what are you hearing from your business contacts at this time? Does it track with what the survey results are?

Bell: Through outreach, I often hear about the use of personal funds to start and operate a business. In reviewing the data, I see that 53 percent of respondents stated that they have used personal funds in response to financial challenges. This tracks well with what I'm hearing. So, I'd say the data does reflect what we're hearing with outreach.

Sablik: Are there any pain points, either in the data or from conversations with business owners?

Corcoran: Tim, I'll mention two things. The first is debt burden, which I mentioned a little bit previously, and the second is the impact of natural disasters.

In terms of debt, we know that a portion of small business owners took on additional debt to weather the pandemic. Even though that feels like a long time ago at this point, financial impacts can be long lasting.

While Paycheck Protection Program loans were forgivable, loans extended through the $380 billion COVID-19 Economic Injury Disaster Loan program, or EIDL program, were not. About 30 percent of 2023 survey respondents had an outstanding EIDL loan on their books, which can create a longer-term financial drag. There's research on fedsmallbusiness.org from our Cleveland Fed colleagues that digs into this more, and I'll be interested to continue to monitor longer-term effects of pandemic era debt.

Second, [there's] natural disasters. The SBCS has a set of special questions specifically for businesses that were impacted by a natural disaster so that we can have reliable information on the extent of impact and the degree to which small business owners are able to recover their losses. Survey data from a few years ago found that one fifth of disaster-affected firms did not recover any of their losses.

Since the devastation and loss of life caused by Hurricane Helene just over a month ago, our Richmond Fed colleagues have been working hard to understand how Fifth District communities are grappling with the storm's aftermath. So, natural disaster resilience and recovery as a whole — and for small businesses in particular — is very top of mind for me.

Bell: I'll be interested in seeing those findings and look forward to that.

I wouldn't call this a pain point, but I want to reiterate that participating in the survey is a great way for small businesses to use their voice. Working in community development, I want to make sure that small business owners have the opportunity to participate and are represented in the data, from the smallest businesses to the largest businesses, from minority and veteran-owned new businesses to the longstanding small business pillars in our communities. So, when the survey rolls out next year, you can expect me or one of my colleagues or one of our intermediaries to be figuratively knocking at your door.

Sablik: That's a great point. As we said, the 2024 survey is closed, but we'll include a link for small business owners who might be interested in signing up to participate in the survey in future years.

What are you watching as we head into next year?

Corcoran: When the 2024 data are released, I'll be looking to see if the measures of firm performance, like profitability and revenue change, either match or exceed 2019 measures. I'll be keeping an eye on overall debt levels, too. We saw an increase in outstanding debt since 2020 and I'm interested to see if that becomes a more sustained trend. Finally, I'm interested to see if application rates continue to decline somewhat, or if they stay relatively constant over time.

Sablik: Erika and Emily, thanks so much for joining me today.