November 26, 2022

The Small Business Credit Survey 2022 Report on Employer Firms, issued by the 12 Federal Reserve Banks, confirmed what many economists have suspected: many small businesses have not recovered to pre-pandemic levels, with the effects of the pandemic hitting disproportionately hard among firms in the leisure and hospitality sector, and smaller firms, particularly businesses owned by people of color.

The Small Business Credit Survey (SBCS) collects information about performance, financing needs and choices, and borrowing experiences of firms with fewer than 500 employees, which represent 99.7% of all employers in the U.S. economy. Responses provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The report includes experiences from nearly 11,000 firms across all 50 states and the District of Columbia through collaboration of all 12 Federal Reserve Banks.

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

Among the SBCS key findings:

  • The pandemic continues to have a significant impact, with 77% of surveyed firms reporting negative effects.
  • Sixty-six percent of employer firms received pandemic-related financial assistance, down from 87% in 2020.
  • A majority of firms, 59%, reported being in fair or poor financial condition, a figure little-changed since the 2020 survey. Firms of color, smaller firms, and leisure and hospitality firms were most likely to be in fair or poor financial condition.
  • Hiring or retaining qualified staff and navigating supply-chain issues are the top operational challenges that small firms have faced.
  • The share of applicants receiving all of the traditional funding they sought fell from 51% in 2019 to 36% in 2020 to 30% in 2021.
  • In 2021, non-Hispanic Blacks and Asians only received 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 amount sought after, followed by Hispanics (32%), non-Hispanic Asians (34%), and non-Hispanic Whites (54%).

Performance and Expectations: Revenue and employment have improved since 2020, but performance largely lags pre-pandemic levels.

  • Eighty-five percent of employer firms experienced financial challenges, up four percentage points since 2020 and up nearly 20 percentage points since 2019.
  • Forty-eight percent of firms saw a decrease in revenue, while 38% saw an increase.
  • Sixty-three percent of firms rare below pre-pandemic revenues and employment is lower for 43% of firms
  • Half of firms in the leisure and hospitality industry reported a large negative effect from the pandemic, while only 26% of manufacturing firms reported the same.
  • Expectations for future revenue and employment growth improved since 2020 but remain below pre-pandemic levels; 59% of firms expect revenues to rise and 41% anticipate employment growth in the next 12 months.
  • Sixty percent of firms reported their top operational challenges were hiring or retaining qualified staff and navigating supply-chain issues. Seventy-eight percent of firms said the too few applicants were a reason for difficulty in hiring workers.
  • Employer firm revenue and employment trends indicate that some firms are recovering from the initial effects of the pandemic, though more firms reported continued declines in revenue and employment

Pandemic-Related Financial Assistance was widely used in 2021, although their use declined from early in the pandemic.

  • The financial assistance programs firms most often turned to were the Economic Injury Disaster Loan program and the Paycheck Protection Program (PPP), with 48% and 47% of firms applying.
  • Forty-two percent of firms applied for PPP in 2020 and 2021, with 36% only applying in 2020 and 6% only applying in 2021
  • 90% of employer firms that applied for PPP funds in 2021 received at least some funding. PPP application approval rates were lower in 2021 than in 2020. The share of firms receiving the full amount of PPP funding sought fell year over year, from 76% in 2020 to 67% in 2021.

Access to Credit: Application rates for traditional financing were lower in 2021 than in recent years, and those that did apply were less likely to receive the amount of money they sought.

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

The most recent Biz2Credit Small Business Lending Index, which reported January 2022 figures, made similar findings. The small business loan approval percentage at big banks ($10 + in assets) was 14.5% in January, while at small banks approved 20.3% of loan requests. Non-bank lenders, which include institutional lenders, factors and cash advance companies approved roughly 25.1% of funding requests, credit unions approved 20.7% in January.

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

The takeaway is that it remains much more challenging for small businesses to secure capital, particularly for hard-hit industries, such as the restaurant industry, and for firms owned by people of color. While the days of forgivable loans are over, both the private sector and government sources, such as the SBA, must open the purse strings wider and be a bit more willing to provide investment capital to small business owners, who create the lion’s share of jobs in the U.S. private sector.

The Brookings Institute, in a report entitled Black-owned businesses in U.S. cities: The challenges, solutions, and opportunities for prosperity, suggests expansion of the Commerce Department’s Minority Business Development Agency (MBDA), which connects minority-owned businesses with the capital, contracts, and markets they need to grow. The recent Infrastructure Investment and Jobs Act provides the MBDA with resources needed to help level the playing field on behalf of minority businesses and minority entrepreneurs.

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

Small businesses create jobs and a sense of community across the country. In a significant way, helping startup and growing businesses is a way of strengthening America itself.