Small Businesses Stable in 2018

The Small Business Credit Survey 2019 recently was released from the Federal Reserve of New York. The report surveyed small businesses in the second half of 2018 regarding various performance indicators and credit outcomes. It comes at a time where global growth concerns from major financial organizations have caused uncertainty in markets as well as hesitance from corporate leadership. In particular, this report documents the responses from 6,614 small businesses with 1-499 employees either full- or part-time.

Small businesses in 2018 reported a general improvement in fundamentals. More than half reported revenue growth in 2018 (57%) and a good amount added workers (37%). That leaves the indices for each of those categories up slightly in 2018. The only performance measure that struggled was profitability. While 57 percent reported operating "at a profit" this number did not grow in 2018. 

Profitability struggles characterized the year as small businesses were forced to grapple with U.S. protectionism. The Fed found that "73 percent of firms reported an increase in input costs" which forced over half (58%) of small firms to pass on the costs to their customers. The effect was an expected consequence of trade tensions and expected to continue into 2019. 

Expectations for revenue and employment in 2019 are muted at best. While 72 percent of firms expect revenue to grow, the share of firms dropped 1 percent from the 2017 survey to the 2018 survey. The drop off was even more severe in employment as the share that expected to see employment growth dropped from 43 percent in 2017 to 38 percent in 2018. Although, employment numbers in the first quarter of 2019 didn't necessarily reflect this sentiment.

The top two financial challenges experienced by small business owners reflected two major trends in 2018. 40 percent of small business owners said that paying operating expenses was a challenge they saw in 2018 in line with the steep rise in the share of firms that saw an increase in input costs. the other most-cited challenge was credit availability which was mentioned by 31 percent of survey respondents. This challenge could have been intensified by the prospect of rising interest rates in the midst of a mountain of debt in the economy.

Despite interest rate hikes and the previous statistic referring to credit challenges, there was a slight increase in the share of firms that were seeking financing. 43 percent responded in the affirmative while only 40 percent responded that way in 2017. Over half (56%) responded that they hope to expand business or access new opportunities. In addition, over half (57%) sought financing sized less than $100,000.

The firms that experienced funding shortfalls had some notable characteristics. Riskier small businesses that had lower credit scores, low profitability (if any), and were younger experienced the most funding shortfalls. Geographically the regions that saw lower financing adequacies were in New England and in urban areas.

The many small businesses of the nation form an important segment of the overall U.S. economy. Because of their size, they are more sensitive to may macroeconomic factors and can often act as leading indicators of economic performance. In the Small Business Credit Survey 2019, data show that financial conditions remain stable for small firms. However, in the face of uncertainty in growth, optimism for 2019 is plentiful.