[Watch] Amplifying small business voices—new findings from the Small Business Credit Survey

Small businesses are on the road to recovery, although hiring, supply chain disruptions, and rising costs remain persistent challenges. As small-business owners navigated these challenges through 2022, pandemic-related funding programs ended, and owners turned to other funding sources – including traditional financial institutions and their own savings. How are small businesses doing? How are they accessing credit, and what gaps remain? On April 13, the Federal Reserve Bank of Cleveland held a Connecting Communities webinar exploring new insights from the Federal Reserve Small Business Credit Survey (SBCS) 2023 Report on Employer Firms.

The Federal Reserve and a diverse group of nonprofits have administered the SBCS since 2016. The only survey of its kind, the SBCS and reports developed from it help the Fed, entities supporting small businesses, lenders, and policymakers better understand the credit experiences and challenges of small-business owners across the country.

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TRANSCRIPT

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Whitney Felder

Good afternoon, everyone. I’m Whitney Felder, communication specialist with Fed Community. Welcome to the Connecting Communities webinar, Amplifying Small Business Voices: New Findings from the Small Business Credit Survey. We are excited to host our fourth Connecting Communities webinar of 2023. If you are a returning Connecting Communities participant, welcome back. If this is your first Connecting Communities webinar, you are in for a treat. Before we move to the content for today’s event, I would like to share a few housekeeping items. Today’s session is being recorded and will later be available for viewing.

Views expressed during this session are those of the speakers and are intended for informational purposes. They do not necessarily represent the views of Fed Communities or the Federal Reserve System.

Microphones have been muted. Please use the Q&A feature throughout the session to submit questions. We promise to get to as many of them as possible during the Q&A portion of this presentation. Also, throughout today’s event, you will see periodic polling questions. We encourage you to answer the polls. They provide helpful insight, and will help move us through today’s discussion.

Finally, feel free to keep the conversation going, and engage with us on Twitter using the hashtag #connectingcommunities, and visit fedcommunities.org for a variety of CD articles, resources and data across the Federal Reserve System. Before turning the program over to Emily Wavering Corcoran, our moderator for today and small business credit survey program manager, I’d like to take a quick second to recognize all the work this team has done to produce this survey. The Federal Reserve System and a diverse group of nonprofits have administered the SBCS, Small Business Credit Survey, since 2016. The only survey of its kind, the SBCS and reports developed from it helped the Fed, entity-supporting small business, lenders, and policymakers better understand the credit experiences and challenges of small business owners across the country.

Now, I will turn it over to Emily, who can provide more insight on this topic. Thank you.

Emily Wavering Corcoran

Thank you so much, Whitney, and just a big welcome to everyone joining us this afternoon. We can go ahead and move to the next slide, please. As Whitney mentioned, the Small Business Credit Survey or SBCS is an annual online survey administered through a collaboration of the 12 Federal Reserve banks in partnership with a network of local, regional, and national nonprofit organizations. We collect our data every fall, and once we gather the survey data, we use a process called Waiting to ensure that the SBCS data are representative of small businesses across the U.S.

Today’s presentation will be data heavy. The slides will be available after the presentation so that you can reference the slides, reference the data, dig through the data, and we very much hope that you will do that. We also want this presentation and the data to be engaging, so we’ll be doing a few polls during our time together. We’ll also share some quotes directly from small business owners. At the end of the presentation, there will be time for a Q&A with some members of the national SBCS team. Up first, we’ve got two quick polling questions for you. You should see them pop up on your screen. Our team won’t be able to see the results until after this program, but you will be able to see the results in real time.

We do want to hear from you through these polling questions, and to understand your interests and perspectives as we continue our work this year. The first question for everyone attending, before today’s event, had you heard of the Small Business Credit Survey? A quick yes or no. I’ll give you just a moment to answer. All right. I hope responses are coming in. I hope I’m not jumping the gun on this, but our next polling question is which segment of small businesses are you most interested to learn more about, startups, solo entrepreneurs, small businesses owned by people of color, women-owned businesses, small businesses in your state or locality, or another segment of our diverse small businesses? Please go ahead and answer. Again, I’ll just give you a few moments to respond.

All right. Let’s move right along to slide six for some key takeaways from the 2022 survey. As small businesses are charting their way through the lasting effects of the pandemic, their experiences indicate that the recovery has been uneven. In the 12 months leading up to the 2022 survey, many firms experienced growth in revenues and employment, but their expectations for future growth are lower than in the 2021 survey. Small businesses continue to face operational and financial challenges. They’ve turned to many different funding sources over the past several years, and with the end of government funding programs, applications for traditional financing have increased.

Approval rates have also risen, but the share of applicants fully approved remains lower than before the pandemic. We will dig into these stories one by one through this presentation. Up next on slide seven, we’ll dive right in. How did businesses perform in 2022? This chart shows growth indices for revenue and employment over the prior 12 months. So, that just means we subtract the share firm’s reporting decreases from the share reporting increases to revenue or employment respectively over the last 12 months. Revenue and employment growth are both positive for the first time since 2019, but you’ll see that they remain well below pre-pandemic levels.

44% of small businesses had increased revenues in 2022, and 29% added employees. With revenue growth and employment growth, was there an increase in the share of profitable firms? Let’s move to slide eight, and take a look. The short answer is yes. There was an increase in the share of profitable firms. 45% of employer small businesses were operating at a profit at the end of 2021. That’s up 10 percentage points from the end of 2020. Profitability gains were evident across firms of all different sizes, as you can see on the slide here, but compared to pre-pandemic times, a smaller share of firms are operating profitably. For example, in 2019, 57% of firms were operating at a profit.

With movement in revenue and employment and profitability, we’ll now go to slide nine to understand how small business owners are thinking about their current financial condition. Even with some improvement in measures of business performance, self-reported financial condition is little changed from the previous two surveys. The share firms reporting that they are in very good or excellent financial condition is up only one percentage point from 2021. With little movement in the self-reported financial condition, how are small business owners thinking about the future? Let’s take a look at the next slide.

When small business owners took the survey in the fall of 2022, they were asked if they expected their revenue and employment levels to increase to stay the same or to decrease over the year to come. As past surveys have shown, small business owners tend to be really optimistic about their future business prospects. More firms expect to see their revenues and employment increase rather than decrease in the year ahead in general. That said, this slide shows that small business owners are not as optimistic as they’ve been in the past.

The net share of small business owners expecting revenue growth fell from 42% to 35%, and remains below pre-pandemic levels. The net share of firms anticipating employment growth also declined falling from 31% in the 2021 survey to 27% in the 2022 survey. At this specific point in time for those 2022 survey dots on the chart, those are fall 2022. A smaller share of small business owners anticipated growth through 2023 relative to the share that anticipated growth through 2022. They were experiencing some uncertainty about the year to come, and some of that uncertainty, no doubt, stems from the operational and financial challenges that small businesses experienced through 2022, which we’ll take a look at on slide 11.

94% of small businesses experienced at least one operational challenge in 2022. Operational challenges were persistent from 2021 through 2022. The tight labor market and supply chain issues topped the list of operational challenges both years. To the supply chain point, I wanted to highlight a quote from a small business in Texas. They told us, “Many businesses are hit by post-pandemic fallout. For instance, we are remodeling contractors. Our market appears strong to observers. However, supply chain issues are restricting production, and cost escalation is chasing away prospective clients.”

That’s just one business, just one glimpse, but I think it illustrates some of the tension, some of the challenges that small business owners experienced through 2022. Of course, it remains to be seen if and how these top operational challenges will shift in future years. But for now, let’s dig a little more into that number one challenge, hiring or retaining qualified staff as we move over to our next slide. The SBCS periodically includes a set of special questions about labor market conditions. These questions were included in the 2021 survey and the 2022 survey, and prior to the pandemic, they were last asked in 2018.

This chart shows the changes in firm’s experiences with hiring new workers. Across all three years, firms were similarly likely to have attempted to hire. In 2021 and 2022, firms found hiring to be more difficult compared to 2018, but in 2022, we saw some decline in the share of firms that said hiring was very difficult. Now, let’s take it one step further as we move to slide 13. Why did employers have a hard time hiring staff? The biggest challenge for firms facing hiring challenges was too few applicants. For this particular question in our survey, firms could select all of the reasons that they encountered, all of the factors that they encountered, and 72% cited too few applicants followed by 62% citing a lack of job specific skills, education or experience.

So then in the face of these challenges, how did employers attract applicants, and retain their workers? In many cases, they raised wages as we’ll see on slide 14. Small businesses really turned a corner from 2021 through 2022 from some operations tightening to wage and benefits boosting. In 2022, firms were more likely to increase employee compensation, or make changes to their hiring practices, and they were less likely to reduce their operations when faced with staffing challenges. About two and three small businesses that had trouble hiring or retaining workers in 2022 responded by increasing wages.

While larger firms were more likely overall to raise wages in response to hiring challenges, the share raising wages increased by a similar amount across firm sizes since 2021. Now, let’s turn to the financial challenges that small businesses faced in 2022 on our next slide, slide 15. The SBCS asks about financial challenges separately from operational challenges, but of course, there’s a direct connection between the two. 94% of small businesses experienced a financial challenge in 2022. Inflation, which is shown here as rising costs of goods, services and or wages, was the most widely experienced financial challenge for small businesses in 2022.

Around four and five firms cited challenges related to rising costs. We know that small businesses have been hard hit by inflation, which is just one of the many reasons why the Fed remains really focused on addressing inflation. Paying operating expenses and handling uneven cash flow, those were the next most common financial challenges. Close to half of firms reported difficulties paying operating expenses, or navigating uneven cash flow. So, how did small businesses respond to these challenges? Let’s take a look on slide 16. In response to those financial challenges that they experienced in 2022, over half of impacted firms, 56%, raised their own prices.

Over half of small businesses that experienced a financial challenge relied on their personal funds to address the challenge, and about 40% obtained funds that will need to be repaid. Then with that information, over the next couple of slides, we’re going to take a look at the use of funds that need to be repaid. Then we’ll turn to personal funds and government funding sources. As small businesses turned to a variety of capital and credit sources through the pandemic, what does their total debt look like relative to years past? Slide 17 gives us that picture.

Following a sharp increase in the share of firms that reported having outstanding debt in the 2020 survey, you’ll see that spike there in the red. The share of firms with debt declined to pre-pandemic levels in the 2022 survey. However, firms in the most recent survey are more likely than respondents prior to the pandemic to report higher amounts of outstanding debt. 40% of firms in the 2022 survey reported having over $100,000 in outstanding debt compared to just 31% in 2019. As we move to slide 18, we will examine where small business owners are turning for their financial services. This slide shows the types of financial services providers that small firms use for their business needs, for business services.

That includes payments processing, business loans, financial accounts, payroll. Most firms reported either using a large or a small bank as a financial services provider. Overall, 56% of firms reported using a large bank as a financial services provider, and an additional 43% used a small bank for financial services. So again, here, they could select all of the different providers that they use for financial services. Beyond banks, 24% of firms relied on a non-bank financial company like a FinTech lender or payments processing company for financial services, 13% used a credit union. That’s a really big picture of the debt and financial services picture.

Now, what about overall use of different funding sources? Let’s move on to slide 19 please. The 2022 survey asked respondents about sources of funding that they’ve used over the past five years. This is a question that we last asked in 2019. In 2019, respondents were most likely to rely on funds from a financial institution or lender, followed closely by funds from the owner’s savings or family and friends. In the 2022 survey, we found that respondents were more likely to use funds from an owner’s savings, friends or family, that’s that orange line, or from a government funding source, that’s the green line, than they were to rely on funds from a financial institution, which is that blue line.

We received a lot of comments about this in the survey. For example, a manufacturer in Louisiana told us, “Our support has come almost exclusively from bootstrapping, privileged access to investment, and private loans from friends and family, and unparalleled support from our community.” Increased reliance on personal and community sources is not surprising, but it does have important implications for different segments of small businesses. Similarly, increased reliance on government funds is not a surprise given the availability of pandemic related assistance through major sources of funding, including the Paycheck Protection Program and the Economic Injury Disaster Loan Program, which together supplied over $1 trillion in support to small businesses.

Over the next two slides, we’ll look at personal sources and government funding sources more closely. So up first, personal sources on slide 20. Younger lower revenue firms were more likely to rely on funds from the business owner’s personal savings, friends or family over the past five years than their counterparts. You can see on this chart that over four in five firms that are five years or younger used personal funds in the past five years, and that’s a similar share for firms with less than $100,000 in annual revenues. On one hand, personal savings have always played an important role for newer, smaller firms, right?

It’s not uncommon to save up and use that money to invest in your new business, or for family and friends to support a new business venture, but the pandemic era increase in reliance on personal funds is notable, and it may have implications particularly for women-owned firms and for firms owned by people of color which are more likely to be younger and smaller. All right. Now, let’s take a closer look at government funding programs over on slide 21. Reliance on pandemic-related financial assistance declined as programs that supported businesses through the pandemic ended. For example, the largest program to support small businesses through the COVID-19 pandemic, the SBA’s Paycheck Protection Program, that closed in May 2021, right?

So, while 77% of firms sought pandemic-related funding in 2021, just 34% of respondents in our most recent survey applied. Conversely, while 66% of firms actually received pandemic-related financial assistance in 2021, 31% received funds in 2022. The most common financial assistance program among our respondents in 2022 was the SBA’s EIDL Program, which 23% of employer firms indicated that they applied to in the 12 months prior to the survey. Last year in 2022, two and three firms did not seek pandemic-related financial assistance. So overall, the pandemic altered the sources of funding that small businesses accessed, an increased reliance on personal sources and government funding sources.

As we transition back to a more normal funding environment, it really remains to be seen if the broader trend of increased reliance on personal funds in particular will last or not. We’re now going to shift a little bit into talking about the traditional credit market, so funding from a financial institution or another lender onto slide 22. This chart shows the share of small businesses that applied for traditional forms of financing, specifically loans, lines of credit, and merchant cash advances, again, in the 12 months preceding the given survey year.

The 2022 survey finds that financing demand rebounded beyond pre-pandemic levels, rising from 25% in the 2021 survey to 40% in the 2022 survey. This rebound makes a lot of sense given the sun setting of pandemic-related programs, but let’s go one step further. Why did small businesses apply for financing in 2022? Let’s take a look on slide 23. Applicant firms most often sought financing to meet operating expenses, which is a post-pandemic trend that continued into the 2022 survey. 65% of applicants applied for financing to meet operating expenses, the highest share in as long as this question has been included in the SBCS.

The share of firms seeking financing to expand their businesses, pursue a new opportunity, or acquire assets rose from 44% in 2021 to 53% in 2022, so a little bump up. But now, let’s move to slide 24 for some information on where small business owners went for funding. In 2022, applicant firms most often sought financing at banks, which is a finding consistent with data from our previous surveys. 43% of applicants applied at a large bank, and an additional 30% applied to a small bank. Although it’s not shown here, the share of applicant firms that sought financing from an online lender rose slightly year over year from 20% in 2021 to 22%.

However, the share of firms that applied to an online lender remains below the 30% of applicants that sought credit from an online lender in the 2019 survey. So, there was a spike in 2019, and it’s come down. As was the case in previous survey years, the sources that applicants turned to for financing differed depending on the credit risk of the firm. Firms with high credit scores were more likely to seek credit from either a large or a small bank than firms with low credit scores, and firms with low credit scores were more than twice as likely to apply at an online lender. Of course, where to apply for financing is a really highly individualized decision, right? It’s a decision driven by a whole host of factors.

On our next slide, slide 25, we have some information about the factors motivating these decisions. At both the large and small banks, the most common reason that firms applied was because they had an existing relationship with the lender. The top factor influencing firm’s decision to apply at an online lender was the speed at which they anticipated either receiving a decision on their application or the funding itself. So, we know that applications for financing rebounded, that a lot of that was motivated by a need to meet operating expenses, and that decisions about where to go for funding are influenced by existing relationships, and speed among other things.

To what degree then were small business owners approved for the financing they sought? Let’s take a look on our next slide, slide 26. This chart shows how access to financing has changed over time. Specifically, it shows the share firms that were fully approved, partially approved, or denied for the loans, lines of credit, and cash advances that they sought. As shown by the green and yellow areas on the chart, the share approved for at least some financing is the highest it’s been since the 2020 survey. The share fully approved rose from 46% in 2021 to 53% in the 2022 survey, while the share that were outright denied fell from 34% to 21%.

Still, the share fully approved remains below the share fully approved prior to the pandemic. Typically, lenders look at an applicant’s revenues over the past two years as part of the underwriting process. So with that, it’s not unexpected that we see lower approval rates during this period, because so many firms experienced revenue losses during the first year after the onset of the pandemic. So, this is really consistent with some respondent comments that we received in the survey indicating that their applications were denied because of lost sales during the pandemic. That said, we do observe differences in approval rates across different firm segments. So, let’s move on now to slide 27.

As we saw on the chart of financing outcomes over time, that share of fully approved firms declined across all firms from 2019 through 2022, from 62% down to 53%. Declines varied by race and ethnicity of the owner. Black-owned firms were the least likely to be fully approved in 2019, and then they experienced the largest decrease in the share fully approved. In 2022, one in five black-owned small businesses was fully approved compared to nearly three in five white-owned firms. Declines also varied by revenue size and industry with smaller firms and those in harder hit industries experiencing decreased approval rates.

Small businesses in leisure and hospitality, for example, experienced a 28 percentage point decrease in the share fully approved. In contrast, businesses with more than $10 million in total revenue experienced an increased approval rate from 83% in 2019 to 88% in 2022. Approval rates do also differ by source as we’ll see when we turn to slide 28. As was the case in previous surveys, applicants at small banks were most likely to be approved. About four in five small bank applicants were approved for at least some of the financing that they sought. Applicants at finance companies, which includes mortgage companies, equipment dealers, and insurance companies, as well as those applicants to online lenders, they also had higher approval rates at 76% and 71% respectively.

How do these approval rates by source compare to past years? Let’s now turn to slide 29. Our survey finds that across banks, finance companies, and online lenders, the share of applicants at least partially approved rose year over year. Among these lenders, applicants at small banks were most likely to be approved with 82% of applicants receiving at least some of the financing that they saw. To wrap up the presentation, I’m going to turn briefly to the degree to which small businesses were satisfied with their experience at different lenders as well as the challenges that they encountered. This information is some of the really unique information that’s collected by the SBCS.

Let’s move on now to slide 30. This chart shows applicants’ net satisfaction, so the share satisfied minus the share dissatisfied at lenders since 2018. Satisfaction levels, as you can see, are consistently highest at small banks. While applicant satisfaction with non-bank lenders, so finance companies and online lenders, declined through the pandemic, net satisfaction with those lenders has rebounded, but again, they remain below satisfaction levels for applicants who go to banks. So, what drives these differences? Slide 31 can provide us with some of that perspective. Overall, applicants to online lenders and finance companies were more likely than applicants at banks to cite one or more challenges with their lenders.

61% of online lender applicants reported at least one challenge. Applicants at banks were much less likely than applicants at online lenders and finance companies to cite challenges with high interest rates or unfavorable repayment terms. However, applicants to banks were slightly more likely to cite challenges related to the difficulty of the application process or the wait time for either the credit decision or the funding itself. All right, I have shown you 25 charts over the last, say, 30, 30, 35 minutes. After 25 charts, that is a wrap for our formal presentation this afternoon. As we move to slide 32, we do have some information on how you can learn more.

Believe it or not, there were some findings that I did not get to in today’s presentation. Please visit our website fedsmallbusiness.org to explore our full report, The 2023 Report on Employer Firms. You can also find a data appendix file there as well as our questionnaire and reports from past years. Later this year, we will be releasing a series of chart books that will display data by firm characteristics, owner demographic characteristics, and geographic area. We will also be releasing a report on firms owned by people of color, and a report on non-employer firms. The 2023 survey will be in the field this fall. This September, it will go out.

If you work for a nonprofit organization that would like to be a survey partner, please sign up at fedsmallbusiness.org/partnership. If you are a small business owner and are interested in completing the survey when it launches, you can also go to fedsmallbusiness.org/partnership. Click the become a partner form, and there’s a space to indicate that you are an interested small business owner. Once you complete that, you’ll be notified once the survey launches in the fall. Now, on to slide 33 for one quick additional plug before we move into Q&A. This summer, June 21st through 23rd, the Federal Reserve Bank of Cleveland, which is the lead reserve bank for the Federal Reserve Small Business Credit Survey, is hosting its Biennial Policy Summit.

Join us in person in Cleveland, Ohio, or virtually for really excellent conversations about policy innovations and solutions to help support thriving communities. You can register at clevelandfed.org. We will now transition into our Q&A. So, just quickly on to slide 34, please. I’m going to be joined by three of my colleagues from the national SBCS team. Maria Thompson leads survey outreach and engagement. Maria Thompson… Excuse me, Lucas Misera and Jordan Manes are researchers who manage the SBCS data, and they help lead our research and our policy work.

As we shift from data to discussion, and as you all think of a few questions, we wanted to poll you once again. So again, you’ll see some polling questions pop up on your screen there. The first polling question for you is which of the following best describes your work with small businesses? I’m a business owner. I work at a business development center, Chamber of Commerce or community organization. I’m a researcher. I’m a lender or other. Again, I’ll give just a moment. As we move on to our last polling question, what is the top challenge small business owners have expressed to you this year?

We’ve got there some of the top challenges that I talked about earlier, hiring or retaining workers, supply chain issues, rising costs or inflation, and managing cashflow. Again, we’ll give just a moment, and I will invite my colleagues to come on camera, and we’ll go ahead and dive into our Q&A. All right. Perfect. Thank you all for responding to the polling questions. Maria, I’m going to kick the first question over to you. Over the last 35, 40 minutes, we took a really deep dive into the data weeds. Can you help us zoom out and contextualize this information? Why does the Fed track small business conditions? What’s our big picture?

Maria Thompson

Well, for starters, most businesses are small businesses or businesses with 500 or fewer employees. 75% have fewer than 10 employees, so knowledge about the small business sector facilitates a better understanding of the overall economy. To add to that, many jobs are at small businesses. About half of all jobs are at businesses with fewer than 500 employees. Additionally, small businesses create opportunity in terms of their ability to contribute to job growth, to rising incomes, and to new career opportunities. So, there are a variety of reasons why the Federal Reserve tracks small business conditions.

Emily Wavering Corcoran

Absolutely. I’ll add to that. I see a question that’s come in about other data sources and how the SBCS fits into some other data sources, including the newly finalized 1071 rule, which of course will capture some small business data. I’ll maybe turn it back to you, Maria, for some of your reflections, but I wanted to just note quickly to the individual who asked about how the SBCS may evolve with 1071 data collection, I just wanted to say that they are quite complimentary data, because the SBCS collects information from small business owners. So, we are able to understand the demand side of the equation while the section 1071 data will provide some of that supply side data.

Maria and Lucas and Jordan, I’d be interested if you have other information that you’d like to share about the connection or potential evolution of SBCS with the finalization of the 1071 rule.

Maria Thompson

Well, I would allow my colleagues to contribute as well, but there’s a variety of information that the Small Business Credit Survey picks up on that many other data sources, and currently the new data that will be collected under 1071 that’s so important and that are qualitative types of data like discouragement. That’s one of the questions on the Small Business Credit Survey. Why didn’t you apply at a lender? Many times, we see minorities don’t apply, because they are discouraged. Those are the types of qualitative questions from the business owner that are really good to get at, and are really good for things like technical assistance and funding and applying for different types of programs.

Emily Wavering Corcoran

Absolutely. Thank you, Maria. Lucas, as one of the report authors, of course, we have a couple of questions about some of the nuances of the data. So, I want to have you jump into some of these. Somebody has asked about the relationship between increased revenue and employment through 2022, and that connection with self-reported financial conditions. If things are improving, why aren’t respondents necessarily feeling better about their businesses, financial condition, or its outlook over the next 12 months? Would you be able to speak to that a little bit?

Lucas Misera

Sure, Emily, and apologies for not being on camera. Technical issues will happen, unfortunately. So, with respect to your question, this is something I noticed pretty early on with our data that we did see some good news for small businesses. For example, we saw revenue, employment and profitability measures tick up year over year, but then there were some not so good news, right? So, the firm’s self-reported financial conditions didn’t move too much, and outlooks actually declined year over year. I think there are two fairly straightforward explanations here.

First, we do need to think about our findings in terms of pre and post-pandemic findings. So, when we narrow our surveys to those post-pandemic findings, we see that across our past three surveys, revenue and employment metrics are hitting highs, right? So, that’s good news. But importantly, when comparing to pre-pandemic surveys, firms are still recovering from a host of economic shocks that took place at the time of our survey. So prior to 2020, it was a case that SBCS respondents were much more likely to tell us that they experienced increases in revenues or employment rather than decreases, but that was just barely the case this year.

So while we see more recent data trending upward, there’s still this lag when compared to pre-pandemic surveys. Secondly, as discussed earlier, there are a lot of headwinds facing businesses that were largely out of the control of the businesses. We know that inflation impacted around four and five employer firms, and we saw that more than half of firms were encountering challenges with hiring or navigating supply chain issues. So even if firms did have a stronger 2022 than they had in prior years, a lot of these businesses still might have been feeling really uneasy given the host of challenges facing their business, especially those outside of their control.

Emily Wavering Corcoran

Absolutely. I’m going to hang with you for a little bit, Lucas, because we have a couple of questions coming in about the data about how we should be thinking about some of the differences that we’re seeing. We have a question about regional differences in the data. So, it sounds like broad interest in regional differences both in performance and in reliance on government funding sources and applications for traditional financing. That’s a big question, but I was hoping that you could provide some perspective on the regional differences that we do see perhaps both by urban and rural, and then, of course, we do also have state level data, and now newly some data for select metropolitan statistical areas.

So, if you can provide some high-level perspective on the differences that we see by geography, that would be great. I would encourage folks listening to check out Fed Small Business for lots of additional information on geographic differences.

Lucas Misera

I would really echo that, Emily. I think folks will probably have a better understanding of the dynamics in their own regions than I would. I mean, one thing I have thought about over the course of the past couple of years is just differences in how different parts of the countries handled the effects of the pandemic. Some parts of the country held onto, I think, restrictions around the COVID-19 pandemic longer than other parts of the country did. Some of those did affect small businesses. It affected revenue and employment growth. So, I do think some of the differences we see around performance, at least in the past three years, were linked to how different parts of the country reacted, and took steps to curb the pandemic.

Oftentimes, I think with our financing numbers, we tend to see differences geographically. I think small banks tend to operate more in more rural areas of the country, so some differences in where firms go for financing, and their approval rates. Ultimately, we see that applicants at small banks are more likely to be approved. Some of that is tied to geography in terms of where they actually go for their financing and their likelihood of being approved. There are some interesting differences, but again, I would encourage folks to go dig into fedsmallbusiness.org.

It’s one of the first times we’ve published MSA-level data, so I think we were able to publish MSA level data for, I want to say, 10 different cities, which is really exciting. So, folks can go dig into that or the state level data to get a more detailed look at their specific region they’re interested in.

Emily Wavering Corcoran

Absolutely. I’ll mention too, of course, that we’ve got chart books coming out in early May, which will also include urban, rural, and state-level findings, and MSA-level findings. So, if digging through an Excel file isn’t your thing, we would certainly encourage you to do that. But if it’s not your thing, and you would rather have a nicely formatted chart book, that is coming in early May for state-level information, MSA-level information, and then of course across a host of different characteristics.

We’ve got… I think I want to spend a little bit of time reflecting on what has changed, and what has not changed since the fielding of the survey in fall of 2022. Jordan, we have a question here about the recent stress in the financial system, and what, if anything, the SBCS can tell us about how that recent stress in the banking sector may affect small businesses. Can I have you speak to that a little bit?

Jordan Manes

Sure. One thing is we’ve seen the demand for traditional financing increase over the last few years now rebounding to above pre-pandemic levels, so we know small businesses are requiring more financing. We also see that about 70% of small businesses that apply for traditional financing are doing so at bank, so they are very exposed to this. This renewed focus we’re seeing on bank balance sheet health and riskiness and stuff like that, that definitely could potentially lead to tighter lending standards, and tighter lending standards tend to hit small businesses hard.

So in that sense, we could see small businesses having a harder time meeting their financing needs going forward as a result of all this stress in the banking sector. Then another effect we’re seeing is that there’s been a bit of a flow of business from smaller banks to larger banks that are maybe perceived as safer in this environment. Small businesses report higher approval rates and higher satisfaction rates at smaller banks. So, this shift away from these banks where they tend to have better experiences to banks where they might have a little bit of a tougher time, that could also have potentially a negative impact on their financing experiences.

Emily Wavering Corcoran

Absolutely. Thanks for that perspective. We also have a few questions about mission-driven lenders, about CDFIs, and other nonprofit mission-driven lenders. Lucas, I’d be interested if you… The questions specifically are how are the approval rates for firms that go to CDFIs, and how do CDFIs, Community Development Financial Institutions, show up in the SBCs data? Lucas, I’d invite you to speak to that, or I’m also happy to jump in to talk a little bit more about CDFIs.

Lucas Misera

Sure. I know, off the top of my head, that CDFIs tended to have lower approval rates than other lenders in the SBCS this year. I don’t remember off the top of my head. I want to say that is typically the case that approval rates tend to be a little bit lower, and that’s in… That runs conversely with what Jordan had just said, where small banks tend to have really high approval rates compared to other lenders. I would kick it back over to you, Emily, who spent a lot more time thinking about CDFIs over the past few years on what we see on them in the survey this year, and what we’ve seen in the past couple of years.

Emily Wavering Corcoran

Absolutely. I mean, I think first and foremost, I would want to emphasize that, of course, CDFIs serve a very specific… They serve some very specific populations of folks, folks who are largely disconnected from the traditional financial system, and they can serve as a real pathway to financial inclusion. Just over the past few years, there’s been really incredible growth in the CDFI sector and their ability to serve small businesses and consumers. So, we do… They are captured in the SBCS data. There is a lot of nuance, I think, to how we interpret the data that we get on them, because of course, they’re a non-exclusive lender category.

They can be… CDFIs can be loan funds. They can be banks. They can be credit unions. So unlike our other lender categories, there’s just some nuance in how we have to understand the data, and we do see lower application rates and lower approval rates for CDFIs. Again, I think a lot of that is population specific, right? It’s the individuals that have been excluded from the traditional financial system that CDFIs are stepping in to help serve, and to help bring them financial services. I think it will be really interesting over the next several years as there continues to be growth in the CDFI sector to see if there are any changes in what we gather in the SBCS, and how we’re able to understand the service of small businesses that takes place by CDFIs.

I will emphasize, too, that, of course, the State Small Business Credit Initiative, SSBCI, will be another really big opportunity for us to just observe the role of CDFIs, and just understand how that coordination happens between government entities, between service providers, CDFIs, and other lenders and small business owners themselves to really have this network of support and coordination to help address some of the disparities, persistent disparities that we see in the small business credit market. All right, we’ve got just five minutes left, so I want to quickly say a couple of data notes, answer a couple of quick questions that have come in.

Then, Maria, I’ve got a really quick final question for you. Our data are separated by employers and non-employers, so a separate report on non-employer firms, individual entrepreneurs will be coming out in late May. We also provide in our report some really specific definitions, so things like definitions of risk categories, our definition of small and large banks. That’s in the report. It’s a 10-billion-dollar dividing line between large and small banks. Again, I would encourage you to check out the report. We’ve got a lot of definitions and information for folks who are really interested in how we define things in the survey.

Then, Maria, super quickly, to close us out, can you please talk about the how and the why of SBCS partnership for any interested nonprofit organizations who might be on the webinar today?

Maria Thompson

Well, we love that question or those types of questions. Interest in becoming a SBCS partner organization can be made via our website, as Emily said, fedsmallbusiness.org. It would be my pleasure to speak with anyone about how partnership works, or to answer any additional questions. We also facilitate partnership, or we make it easy for organizations to be a member by sending them out marketing toolkits so that they can field the survey to their networks of small businesses. As we know, the voice of small businesses many times goes unheard, and this is a really good and important way of how those voices can be elevated when you think about this being the largest survey of its kind. So, it’s terrific when we can get as many partners as we can to help us in this work.

Emily Wavering Corcoran

Absolutely. I know that we didn’t get to all of the questions that were submitted today, so I just wanted to thank folks for submitting questions. We can do some followup to make sure that any questions we weren’t able to respond to here still get answered. I’ll also just say quickly that the slides for this presentation will be available within two weeks of this event, as will the recording. So if you are interested in the slides, you can certainly have them. That’s all the time that we have for today. Thank you so much again. Whitney, back over to you.

Whitney Felder

Thank you, Emily. That was a great presentation today. We want to thank the Small Business Credit Survey team for providing that insightful information, and engaging our audience. Attendees, thank you for spending your afternoon with us, your valuable time. We appreciate it. Before we close out this session for good, we do have a few small requests. Please complete the survey that will be sent to you immediately after the event, so we can improve and continue to bring you timely and relevant topics. Today’s session, as Emily said, will be available on YouTube and the Connecting Communities website through fedcommunities.org in about two weeks.

Visit fedcommunities.org to access additional articles, resources, and data about community development across the Federal Reserve System, and don’t forget to subscribe to the Fed Community’s monthly newsletter by clicking the About Us tab, and then clicking subscribe. This session, including the slides, will be available and featured in our next newsletter as well as on our website. We’re on LinkedIn, Twitter, Instagram, and Facebook. Be sure to give us a follow. Finally, mark your calendars for our next Connecting Communities event happening May 11th at 3:00 PM Eastern Standard Time. More details and registration and event information will be coming out soon.

Thank you again for Connecting Communities with real people for real conversations about real topics and research. Have a fabulous afternoon.