Survey: Small Businesses Not Equipped to Handle Long-Term Disruption in Revenues

The latest Small Business Credit Survey by the Federal Reserve Banks found that most small businesses were not equipped to handle a long-term loss of revenues.

The survey, which was based on responses collected in the third and fourth quarter of 2019, prior to the outbreak of the coronavirus in the U.S., serves as a benchmark for how these firms entered the crisis period and highlights the challenges many were already facing.

In the last twelve months, 66 percent of small businesses faced financial challenges with paying operating expenses being the most frequent cited financial challenge at 43 percent.

Seventeen percent of small businesses said that they would have to close or sell if they experienced a two-month loss in revenue, according to the survey.

Over the last five-years, the primary source of funding for small employers was personal savings, family, or friends at 56 percent. This was followed by banks at 44 percent. Credit unions as a source of funding was 6 percent.

In addition, the share of firms that applied for financing remained flat at 43 percent between 2018 and 2019. Large banks received the most credit applications from small businesses (40%) during the survey period, followed by small banks (36%), online lenders (33%), finance companies (18%), credit unions (9%) and CDFIs (3%).

The survey found that banks were the most common source of credit for small businesses that had not applied for credit. Credit unions were a source of credit for 8 percent of small businesses that had not applied for credit in the prior 12 months.

The survey found that nonapplicant small businesses were more satisfied with credit unions and small banks compared to other lenders.

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A second report by the Federal Reserve Bank of New York uses the results from the survey to look at whether small businesses can weather the economic impact of COVID-19.

At the time of the survey, 23 percent of the small businesses were at-risk and 6 percent were distressed. while 70 percent were either healthy or stable.

Only 1 and 5 healthy small businesses have cash reserves to meet a two-month loss of revenue.

Read the brief.