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Financial Services Law Insights and Observations

Fed’s Small Business Credit Survey shows Covid-19 challenges

Federal Issues Small Business Lending Covid-19 Federal Reserve Banks

Federal Issues

Recently, the Federal Reserve Banks released the 2021 Report on Employer Firms covering findings from their small business credit survey (SBCS), which gathered insights from nearly 10,000 small businesses with fewer than 500 employees on challenges resulting from the Covid-19 pandemic, as well as on business performance and credit conditions. SBCS findings showed that few small businesses were able to avoid negative impacts as a result of the pandemic, and notably revealed disparities in experiences and outcomes across business and owner demographics, including race and ethnicity, industry, and firm size. Key findings include:

  • Small businesses’ financial conditions sharply declined between 2019 and 2020, with firms owned by people of color reporting greater challenges. Statistics include: (i) 78 percent of firms reported decreases in revenue; (ii) 79 percent, 77 percent, and 66 percent of Asian-owned, Black-owned, and Latinx-owned firms, respectively, “characterized their financial condition as ‘fair’ or ‘poor’” (in contrast to 54 percent of Non-Hispanic White); and (iii)  the share of firms carrying more than $100,000 in debt increased from 31 percent in 2019 to 44 percent in 2020.
  • 91 percent of small businesses applied for some type of emergency funding. The Paycheck Protection Program (PPP) was the most commonly used program, with 77 percent of PPP applicants receiving all of the funding they requested. Applications were most frequently submitted through large and small banks, with 95 and 83 percent of applicants having an existing relationship with either a large bank or small bank, respectively, prior to applying for a PPP loan.
  • 64 percent of small businesses would apply for additional government-provided assistance if it were available, with 39 percent reporting that “they would be unlikely to survive until sales return to ‘normal’ (that is, 2019 levels) without further government assistance.”
  • Approval rates on loans, lines of credit, and cash advances decreased. Prior to the start of the pandemic, 81 percent of small businesses were at least partially approved for funding. After March 1, only 70 percent received partial approval.
  • Use of online lenders decreased during 2020, with 42 percent of small businesses applying for loans, lines of credit, or cash advances through a large bank (43 percent turned to a small bank). In contrast, the number of small businesses that applied to online lenders fell from 33 percent in 2019 to 20 percent in 2020. Notably, small businesses with lower credit scores applied to online lenders and nonbank finance companies more often than their higher credit score counterparts. Moreover, small businesses that received financing from online lenders reported a decline in net satisfaction.
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