4 in 5 Microbusinesses Use the Owner’s Personal Funding to Grow

2017 Small Business Credit Survey: Microbusinesses Struggling to Find Loans, Using Personal Money to Fill Shortfalls

Securing a business loan is often a challenge for many businesses. But, for small businesses, it is even tougher than for larger firms finding loans.

2017 Small Business Credit Survey

According to a report based on findings from the 2016 Small Business Credit Survey released by the Cleveland and Richmond Federal Reserve Banks, microbusinesses are less likely than larger employers to be approved for financing. Not surprisingly, these microbusinesses are being forced to rely on the personal finances of their owners to secure funding.

Roughly 4 in 5 microbusinesses with financial challenges used personal funds to address their challenges, per the study.

Feds Credit Survey Shows Small Businesses Struggling with Financing

Despite struggling to find loans, microbusinesses (defined as nonemployer firms and small firms under four employees) are resilient and create jobs. These small firms, however, are less profitable than larger employers and often face more financial challenges.

The report noted nonemployers, businesses that employ no one outside the business owner, are just as likely to be operating at a loss as they are a profit. And while 54 percent of larger employers reported facing financial challenges, this was true for 61 percent of nonemployer microbusinesses.

“Microbusinesses account for about 9 in 10 firms and about 34.9 million jobs in the United States. These firms, therefore, play a vital role in the nation’s economy,” wrote the study authors.

If small businesses play a vital role in the nation’s economy, government and other stakeholders should pay attention to small business struggles and promptly use insights such as these to promote their welfare. Small businesses shouldn’t have to struggle so much to fulfill their financing needs.

Government Should Improve Small Business Credit Environment

Of the loan applications made in the 12 months leading up to the Small Business Credit Survey, just 30 percent of microbusinesses applied for funding compared with 50 percent of larger businesses. Seventy-two percent of microbusinesses that applied for financing requested amounts under $100,000.

Although microbusinesses seek smaller amounts, they are more likely to be discouraged about their prospects for approval, the study found. This fact has changed the way small businesses and small business owners approach financing. Some choose not to apply for loans from large banks at all, instead turning to alternative lenders for loans to expand their businesses or pursue new opportunities

The Cleveland and Richmond Feds report on microbusinesses compares the experiences of nonemployer firms, small firms with between one and four employees, and larger companies with less than 500 employees. It is one in a series of reports based on the findings of the 2016 Small Business Credit Survey, a national collaboration of the Community Development Offices of the 12 Federal Reserve Banks.

The Federal Reserve Small Business Credit Survey reportedly aims to gather timely insight to help address gaps in researchers’ and policymakers’ understanding of the experiences of this segment of business. Overall, 10,000 surveys were completed by employer firms in this study across all 50 states.

Check out below a graphic representation of the 2016 SBCS findings on the state and borrowing experiences of small businesses in the country.

2017 Small Business Credit Survey: Microbusinesses Struggling to Find Loans, Using Personal Money to Fill Shortfalls

Images: Cleveland and Richmond Federal Reserve Banks

1 Comment ▼

David William David William is a Staff Writer for Small Business Trends. He covers franchises, brick and mortar businesses, public policy and other small business issues. He is also founding editor of WebWriterSpotlight.

One Reaction
  1. It starts with that. With it, there is no obligation for payment. It is the owner’s personal money after all.