Small US businesses are key sources of jobs, but only 40 per cent last year received the full amount of private financing they sought, according to a Federal Reserve survey. A nationwide survey showed 36 per cent of small businesses – those with fewer than 500 employees – received only some of the funding sought, while 24 per cent received none.
The annual survey conducted by the 12 Federal Reserve Banks offers an look into the conditions facing small business, which account for more than half of all US jobs, and 66 per cent of new jobs created since the 1970s.
“Despite their outsized role in the US economy, many small businesses lack the financing necessary to stabilise and grow their businesses,” said New York Fed President William Dudley. “Supporting access to capital and effective financial management empowers small businesses to thrive in today’s evolving economy, so that they can continue driving job growth and innovation.”
The leading reasons for credit requests being denied included weak business performance, insufficient collateral, low credit score, too much debt outstanding, and insufficient credit history, the report said. Faced with this challenge, 76 per cent of small business owners used personal funds to finance their needs. Other common responses included taking out additional debt, making a late payments, cutting staff hours or laying off workers.
Fed officials said the report also showed the importance of personal credit history, with 42 per cent of small businesses relying exclusively on the owner’s personal credit scores to obtain financing. “This highlights how important it is for small business owners and entrepreneurs to establish and maintain good personal credit in order to establish or grow their businesses,” one Federal Reserve official told reporters, adding that the negative hit from the 2008 financial crisis also crimped small business.
The survey also looked at a subset of small business, those firms with under US$1 million in annual revenues, and found they tended to encounter more difficulties than larger companies.
The report did not include any policy recommendations.