The number of small businesses reporting revenue and employment growth increased from 2017, but the share of firms operating at a profit remained flat, according to a Federal Reserve survey.
The outlook for 2019 is more tempered. While credit demand increased marginally in 2018, the share of firms receiving credit remained essentially flat. Startup firms and firms with high credit risk continued to have financing shortfalls.
Online lenders 1 in particular saw applications increase by approximately one-third from the prior year, even though applicants remained dissatisfied with the interest rates and terms offered, relative to traditional lenders.
Respondents showed consistent year-over-year demand for new financing, with 43% of firms applying for new capital in 2018, similar to the 40% who did so in 2017. Nearly half of applicants (47%) received the full amount of funding they requested, similar to the 2017 survey.
Financing shortfalls were particularly pronounced among firms with weak credit profiles, unprofitable firms, younger firms, and firms in urban areas.
Applications to online lenders continued their growth trend with 32% of applicant firms turning to such lenders in 2018, up from 24% in 2017, and 19% in 2016. These applicants expected online lenders would make faster funding decisions, would be more likely to provide funding, and would not require collateral.
Applicants who sought funding at large and small banks cited an existing relationship as the primary factor in their choice of lender.
More than one-third of small firms (37%) added payroll employees in 2018, and employment gains were strongest among startups, firms with five or more employees, firms with more than $1M in annual revenues, and firms with younger decision makers (46 or younger).
A majority of firms (73%) saw input costs increase in the prior 12 months. Expectations for 2019 are mixed with a majority of firms (72%) expecting revenues to increase but 44% planning to add employees.
The Small Business Credit Survey, which focuses on small employer firms with fewer than 500 full- or part-time payroll employees, collected responses in the second half of 2018.