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A Thumbs Up for Small Business Lending and Growth

The Richmond Fed's Regional Executive Andy Bauer talks with U.S. Small Business Administration representatives including Regional Administrator Michelle Christian, who gave welcoming remarks during the half-day small business workshop.

By Corporate Communications and Regional and Community Analysis

Nationally, applications to online lenders continue their upward trend despite having lower application satisfaction levels than large and small banks, according to Regional Community Development Research Manager Shannon McKay, a research collaborator on the Federal Reserve’s Small Business Credit Survey: 2019 Report on Employer Firms released on April 16. The report includes the collective findings of the Federal Reserve’s survey of small business owners with up to 499 full- or part-time employees regarding their financing and debt needs and experiences. The Richmond Fed has been participating in the annual survey since 2015.

Small business workshop attendees and presenters network during a break in the program.

The survey’s purpose is threefold. First, it gives policymakers and lenders a better understanding of the needs of small businesses to inform incentives, protections and lending product development. Second, the survey provides small businesses and technical assistance providers with information to make informed decisions about credit strategies. Finally, the data collected offers researchers more information to begin to discern what will help small businesses grow more, grow faster and grow the economy. Small businesses are important drivers of local and regional economic growth in addition to being a key source of household wealth.

McKay shared a snapshot of the national findings during a small business finance workshop at the Richmond Fed’s Baltimore, Maryland, branch office on April 30. Roughly 50 people attended the program, Financing Small Business in Maryland: A Workshop for Financial Institutions, which included speakers from the U.S. Small Business Administration (SBA), the Maryland Department of Housing and Community Development, the Maryland Small Business Financing Authority, Maryland Capital Enterprises, Inc. and the U.S. Department of Agriculture (USDA).

Peter Dolkart, Regional Community Development Manager, introduces Todd Scott, Director, Neighborhood BusinessWorks, Maryland Department of Housing and Community Development to the audience.

During the program, financial institutions heard about the latest SBA and USDA lending products along with community development financial institutions (CDFIs) partnership or referral opportunities that could help them meet the needs of their small business clients. Jennifer Coltharp from Hanover Securities, one of 12 SBA-approved pool assemblers in the U.S., discussed the benefits to financial institutions of selling SBA-guaranteed loans in the secondary market. Todd Scott from Maryland’s Department of Housing and Community Development shared financing success stories from the Neighborhood BusinessWorks program, which has funded $131 million, participated in over 700 projects, created or sustained 14,000 jobs and leveraged $490 million in private investment since the program’s inception in 1995. Cynthia Durant from the Federal Deposit Insurance Corporation (FDIC) showcased a refresh of the Money Smart for Small Business modules, a partnership between the FDIC and the SBA that provides guidance on starting and managing a business.

Delving into the results for the Fifth District, the overall outlook for employment growth is good and getting better for the many small businesses located in the Richmond Fed’s region, which includes Maryland, Washington, D.C., Virginia, North Carolina, South Carolina and most of West Virginia. “Small businesses in our region were less likely to report no employment changes (41 percent) than the entire country (49 percent), and there was a larger likelihood that Fifth District firms did not have a change in input costs (26 percent) compared to firms nationwide (22 percent),” noted McKay.

Fifth District firms were more likely to rely on retained business earnings (74 percent) and less likely to rely on external financing (10 percent) than firms nationwide (69 percent and 13 percent, respectively). They were just as likely to have applied for financing in the prior 12 months as firms nationwide, with 43 percent submitting at least one application. Small banks made up a smaller percentage of these applications, with 36 percent of applicants in the Fifth District applying to those compared to 44 percent nationally. Among nonapplicants, Fifth District firms were more likely to use a CDFI as a source for external financing (8 percent) compared to the national average (5 percent). They were also more likely to cite “speed of decision or funding” as the largest factor in where they applied for credit, with 45 percent in the Fifth District noting this compared to 34 percent nationally.

Firms in North Carolina (39 percent) and Virginia (40 percent) were less likely to apply for credit than firms nationally (43 percent). Virginia firms were more likely to cite “no collateral required” in their application decisions, 37 percent vs. 26 percent nationally. Among nonapplicants, firms in North Carolina were more likely to use CDFIs (19 percent) and less likely to use small banks (22 percent) and online lenders (6 percent) as a source for external financing compared to firms nationwide (5 percent, 37 percent and 10 percent, respectively). We see a similar pattern in Virginia among nonapplicant firms where they are less likely to use online lenders (5 percent) as a source for external financing compared to firms nationwide (10 percent). Additional state-level results also are available.

Note: Fifth District state-level estimates are only available for North Carolina and Virginia employer firms, due to insufficient sample sizes.

Resources serves as a hub for small business research, analysis and thought leadership.

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