Fed survey of small business credit identifies companies hardest hit by pandemic

the Small Business Credit Survey 2022 Employer Business Reportpublished by the 12 Federal Reserve Banks, confirmed what many economists suspected: many small businesses have not returned to pre-pandemic levels, with the effects of the pandemic disproportionately hitting businesses in the leisure and hospitality, and small businesses, especially businesses owned by people of color.

The Small Business Credit Survey (SBCS) collects information on the performance, financing needs and choices, and borrowing experiences of businesses with fewer than 500 employees, which represent 99.7% of all employers of the American economy. The responses provide insight into the dynamics behind overall lending trends and notable small business segments. The report includes the experiences of nearly 11,000 companies in all 50 states and the District of Columbia through the collaboration of the 12 Federal Reserve Banks.

Pandemic-related financial assistance programs were widely used in 2020 and 2021, although their use declined in the 12 months prior to the survey. Notably, companies most susceptible to the negative effects of the pandemic were less likely to receive the financing they needed.

Among the main conclusions of the SBCS:

  • The pandemic continues to have a significant impact, with 77% of companies surveyed reporting negative effects.
  • Sixty-six percent of employing companies received pandemic-related financial assistance, up from 87% in 2020.
  • A majority of businesses, 59%, said they were in fair or poor financial condition, a figure that has changed little since the 2020 survey. Businesses of Color, Small Businesses, and Leisure and Hospitality Businesses were most likely to be in fair or poor financial condition.
  • Hiring or retaining qualified staff and managing supply chain issues are major operational challenges that small businesses have faced.
  • The share of applicants receiving all the traditional funding they seek has increased from 51% in 2019 to 36% in 2020 and 30% in 2021.
  • In 2021, blacks and non-Hispanic Asians received only 14% of what was sought, compared to 19% for Hispanics and 34% for non-Hispanic whites. In 2019, non-Hispanic blacks (26%) still received the least wanted amount, followed by Hispanics (32%), non-Hispanic Asians (34%) and non-Hispanic whites (54%).

Performance and expectations: Incomes and employment have improved since 2020, but performance is well below pre-pandemic levels.

  • Eighty-five percent of employing businesses have experienced financial difficulties, up four percentage points since 2020 and up almost 20 percentage points since 2019.
  • Forty-eight percent of businesses saw their revenue decrease, while 38% saw their revenue increase.
  • Sixty-three percent of businesses are scarce below pre-pandemic revenues and employment is lower for 43% of businesses
  • Half of companies in the leisure and hospitality sector reported a significant negative effect from the pandemic, while only 26% of manufacturing companies reported the same.
  • Expectations for future income and employment growth have improved since 2020, but remain below pre-pandemic levels; 59% of companies expect an increase in revenue and 41% anticipate job growth over the next 12 months.
  • Sixty percent of companies said their top operational challenges were hiring or retaining qualified staff and managing supply chain issues. Seventy-eight percent of companies said too few applicants were a reason for difficulty hiring workers.
  • Trends in revenue and employment of employing companies indicate that some companies are recovering from the initial effects of the pandemic, although more companies have reported a continued decline in revenue and employment

Financial assistance related to the pandemic was widely used in 2021, although their use has declined since the start of the pandemic.

  • The financial assistance programs that companies turned to most often were the Economic Disaster Loan program and the Paycheck Protection Program (PPP), with 48% and 47% of companies applying.
  • Forty-two percent of companies applied for PPPs in 2020 and 2021, with only 36% in 2020 and just 6% in 2021
  • 90% of corporate employers who applied for PPP funds in 2021 received at least one funding. Approval rates for PPP applications were lower in 2021 than in 2020. The share of companies receiving the full amount of PPP funding sought decreased year-over-year, from 76% in 2020 to 67 % in 2021.

Access to Credit: Traditional funding request rates were lower in 2021 than in recent years, and those who applied were less likely to receive the amount of money they sought.

  • The share of companies seeking traditional financing has increased from 43% in 2019 to 37% in 2020 to 36% in 2021.
  • The decline in approval rates has been particularly pronounced for companies with good credit ratings, with the share of low credit risk companies having received all funding sought falling from 45% in 2020 to 38% in 2021.
  • Firms more often sought financing to meet their operating expenses rather than to expand their business.
  • Satisfaction rates were highest among applicants from smaller banks.
  • Businesses owned by people of color, businesses with fewer employees, and leisure and hospitality businesses were the least likely to receive the full amount of funding sought.
  • Seventy-six percent of companies approved for financial assistance were satisfied with small banks, compared to 62% for large banks.
  • Online lender applicants reported being offered money at high interest rates and less favorable repayment terms.

The most recent Biz2Credit Small Business Loan Index, which released January 2022 figures, made similar conclusions. the small business loan approval percentage in large banks ($10+ in assets) was 14.5% in January, while in smaller banks 20.3% of loan applications were approved. Non-bank lenders, which include institutional lenders, factors and cash advance companies, approved about 25.1% of funding requests, credit unions approved 20.7% in January.

However, two years ago, in January 2020, before the pandemic hit, large banks approved 28.3% of loan applications and small banks granted more than half (50.4%) of their loan applications. small business financing. Additionally, the percentages of non-bank lenders in 2020 were even higher: institutional lenders approved nearly two-thirds (66.4%) of applications, alternative lenders granted 56.1%, and credit unions approved 39.6%, according to Biz2Credit Index.

The takeaway is that it remains much more difficult for small businesses to raise capital, especially for hard-hit industries, such as the restaurant industry, and for businesses owned by people of color. As the days of repayable loans are over, the private sector and government sources, such as the SBA, need to open the purse strings wider and be a little more willing to provide investment capital to small business owners. businesses, which create the lion’s share of jobs. in the American private sector.

The Brookings Institute, in a report titled Black-Owned Businesses in American Cities: The Challenges, Solutions, and Opportunities for Prosperity, suggests expanding the Commerce Department’s Minority Business Development Agency (MBDA), which connects minority-owned businesses to the capital, contracts and markets they need to grow. The recent law on investment and employment in infrastructures foresees MBDA with resources to help level the playing field on behalf of minority businesses and minority entrepreneurs.

Making funding available to minority-owned businesses will help them survive, as will programs such as the Restaurant Revitalization Fund (RRF) provided funds to help restaurants stay afloat during the pandemic. There are limits to what government can do, but it is important to create an atmosphere that better helps small businesses survive. Agencies, such as the SBA, play a key role in enabling small businesses to thrive.

Small businesses create jobs and a sense of community across the country. Significantly, helping start-ups and growing businesses is a way to strengthen America itself.