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Dec. 12, 2018

Federal Reserve Banks Release Report on Experiences of Nonemployer Small Businesses

Seventy-one percent of Nonemployer Firms Have Annual Revenues of $100K or Less; Results Show Many Use Personal Funds to Address Financial Challenges; Potential Employers Are Most Likely to Have Unmet Funding Needs.

The Federal Reserve Banks of New York, Cleveland and Richmond today issued the “2018 Small Business Credit Survey Report on Nonemployer Firms,” which examines the business conditions and the credit environment of small businesses with no employees other than the business’s owners. The report is based on the Small Business Credit Survey that was fielded in 2017. Nonemployer firms can include gig workers, startups that are planning to hire employees and mature businesses that rely on contract workers as their workforce, among others.

Nonemployer firms make up about 80 percent of all small businesses and employ 17 percent of the American workforce, yet little is known about their financing experiences. This report addresses this knowledge gap by providing a deeper understanding of the unique characteristics of nonemployer firms and the challenges they face. A report on the experiences of small employer firms was released earlier this year.

“Nonemployer firms are an important source of income for many individuals, so it’s critical to determine whether self-employment is working for them,” said Claire Kramer Mills, assistant vice president at the New York Fed. “Some segments of these firms — especially those planning to hire employees in the future — are more prone to face financial challenges and may have unmet funding needs. These obstacles may limit their near- or longer-term growth prospects.”

A key feature of this report is a deep-dive into five different categories of nonemployer firms based on the nature of their work. This includes “supplemental work” where the business is not the owner’s primary source of income, as well as contract work.

Key findings can be found in the “Report on Nonemployer Firms’” executive summary. These findings include:

Performance and Expectations

  • Nonemployer firms are small: 71 percent have $100K or less in annual revenue.
  • A net 8 percent of nonemployer firms were profitable, driven mainly by very high profitability among larger-revenue firms (firms with more than $100K in annual revenue). A net 50 percent of larger-revenue firms were profitable, compared to a net -8 percent of smaller-revenue firms (meaning that 8 percent more smaller-revenue firms had losses than had profits).
  • Nonemployers overall have positive expectations for future revenue and employment growth (a net 62 percent and 28 percent, respectively). Smaller-revenue nonemployers are somewhat more optimistic about their future revenue growth than larger-revenue firms.

Financing Demand, Approvals and Sources

  • Only 25 percent of nonemployer firms applied for financing. Of those that did not apply, 39 percent reported they have sufficient financing, and 31 percent were averse to taking on debt.
  • Among nonemployer applicants, 34 percent were approved for the full amount of financing sought. Two-thirds reported funding shortfalls or receiving less than the amount they applied for.
  • Larger-revenue applicants were more likely to apply for loans or lines of credit at large banks and small banks compared to smaller-revenue applicants.

Financial Challenges and Reliance on Personal Finances

  • Nonemployer firms cited paying operating expenses (32 percent) and accessing credit (27 percent) as their top financial challenges.
  • Seventy-four percent of nonemployer firms with financial challenges used personal funds to address the challenges.
  • Personal guarantees (39 percent) and personal assets (26 percent) were the most frequently used collateral for acquiring debt, and 65 percent of credit card holders use a personal credit card for business financing.

Nature of Work
Nonemployer firms differ greatly in the nature of their work. A key feature of the report is a deep dive into five different categories of nonemployer firms. Detailed definitions of these categories can be found in the Nature of Work section of the report.

  • Potential employers — nonemployers that plan to add employees in the next 12 months — are more likely than the others to seek financing, and often report they sought funding to expand their business. Among both early and later-stage potential employers, 32 percent applied for financing, compared to only 18 percent of supplemental work firms and 20 percent of contract work firms.
    • Of all nonemployers, potential employers are most likely to have potentially unmet funding needs. More than half of these nonemployers either were not funded for the full amount needed, or chose not to apply even though they may have needed funds. Only one-quarter of all potential employers have had their funding needs met, compared to more than 40 percent for all other nonemployers.
  • Supplemental work firms — where the business is not the owner’s primary source of income and the owner has no plans to hire employees — are the least likely to apply for financing, but those that do apply have the highest rate of success out of all nonemployer segments, despite only one-third reporting that they are profitable.
  • In contrast, later-stage potential employers — those that have been in business more than two years that plan to add employees in the next 12 months — have the highest application rate but the lowest rate of successfully securing funds.

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 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 of firms from 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 2017 SBCS collected 14,465 responses in total, 5,547 of which were from nonemployer firms.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District—including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia—to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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