Raising Capital

Fed Survey Sheds Light on Evolving Small Business Credit Landscape

Locavesting Staff | March 7, 2016


Small businesses improved their performance last year, enhancing their ability to get credit. Banks, especially smaller ones, continue to be the go-to source for small business financing. But online lenders are making inroads, particularly with microbusinesses.

These are some of the top-level findings of the 2015 Small Business Credit Survey, conducted by seven regional Federal Reserve Banks covering 26 states in the east, south and midwest. The joint survey, which has been conduced since 2014, provides an interesting glimpse into the financing habits and challenges of small businesses, which rely more on credit than equity financing (just 4% of respondents sought equity investment).

The survey, released last week, drew responses from 3,459 firms, including startups (less than 2 years old), microbusinesses (under $100,000 in revenue) and growing firms (those that are increasing revenues and employees).

Among the businesses surveyed, 47% applied for financing in 2015, mainly to fuel expansion or pursue a new opportunity. Of those that did not apply, half said they had sufficient funding, while 25% were debt-averse and 16% were too discouraged to apply.

The majority of firms seeking financing applied for traditional loans or lines of credit from banks—52% from small banks and 42% from large banks. But online lenders are gaining a foothold. Twenty percent of all firms applied to an online lender, including 30% of microbusiness applicants and 22% of small firm applicants ($100K–$1M in annual revenues).

More Credit Flowing

Overall, small businesses did significantly better in 2015, reporting increased revenue growth, profitability, and job growth. That translated into more financing success, with 64% getting all or most of the financing they sought, compared with just 51% in 2014. Just 10% were turned down completely, compared to 35% the prior year. The top reasons for being denied credit? Insufficient collateral and weak business performance. In addition, microfirms, startups and growing firms that struggled to get financing cited insufficient credit history.

As a result, small business that were turned down were unable to meet expenses, delayed expansion or dipped into personal funds.

Small Banks Rule

Not only did more firms apply to small banks than large banks and other sources of credit, small banks also approved more loans and received top satisfaction ratings. Online lenders, however, had the highest credit approval rates: 71% of applicants were approved for at least some credit.

Credit Sources

Approval Rate Source Type

Online Lenders: Last Resort?

Online lenders offer convenience and speed, but small firms still prefer traditional sources, the survey suggests. Firms unable to obtain traditional bank financing were more likely to apply for credit cards and for financing at online lenders. Only 38% of those that sought online credit were able to secure financing elsewhere, and most of those were approved for only some of the financing requested. The hesitancy may be due to dissatisfaction with the high interest rates and business practices of some online lenders.

Lender Satisfaction Score

Dissatisfaction Reasons

Micro-businesses Struggle the Most

Overall, about half the firms surveyed received less financing than they sought, resulting in a shortfall. But their success rate varied by their size: just 27% of companies with greater than $10 million in revenues reported a financing shortfall, compared to 63% for microbusinesses. The top reasons these small fry were denied full credit were insufficient credit history and insufficient collateral. They reported that, because of the funding shortfall, they were unable to meet expenses or delayed expansion.


The Small Business Credit Survey is a joint effort of the Federal Reserve Banks of New York, Atlanta, Cleveland, Philadelphia, St. Louis, Boston, and Richmond.

Other findings include:

Cash flow is a common challenge for small firms.

ƒ 22% of employer firms say managing cash flow is their top business challenge, above business costs and far above government regulations and taxes.

ƒ Talent is an issue for growing firms. 24% say that finding/retaining qualified staff is their top challenge.

The majority of respondents, 63%, hold debt, mostly in small amounts and secured with personal assets.

ƒ More than half hold $100,000 or less in debt. ƒ

63% of firms pledged personal assets or guarantee to secure debt.

ƒ Use of personal assets as collateral is very common, even among larger and more mature firms. 58% of employer firms with more than $10 million in revenues and 63% of firms that started 11 or more years ago used personal assets or guarantees to secure their financing.


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