Federal Reserve Bank of Richmond

08/27/2024 | News release | Distributed by Public on 08/27/2024 08:45

Credit Checkup: A Look at the Financing Experiences of Small Businesses in Virginia, Washington, D.C., and North Carolina

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Credit Checkup: A Look at the Financing Experiences of Small Businesses in Virginia, Washington, D.C., and North Carolina

Regional Matters
August 27, 2024

There are about 6.3 million businesses with employees (or "employer firms") across the United States, and just over half a million of those firms are located in the Richmond Fed's Fifth District, which includes Maryland, the District of Columbia, Virginia, North Carolina, South Carolina, and most of West Virginia. Financing can play a critical role in the health of these businesses, and small business credit access is among the community development finance research topics that the Richmond Fed prioritizes to help support economic vitality in communities.

Every fall, the 12 Federal Reserve Banks run a survey to capture the credit experiences and needs of America's small businesses (those with fewer than 500 employees) over the preceding year. The Small Business Credit Survey (SBCS) showed steady business performance for employer firms in 2023. Nationwide, the share of small businesses holding over $100,000 in debt held steady after an uptick in 2020 that was largely driven by emergency borrowing. In 2023, the share of firms that applied for a loan, line of credit, or merchant cash advance (or "traditional financing") returned to pre-pandemic levels at 37 percent. About half of those firms received all of the financing they sought, but as has been the case for many years, approval rates varied depending on where the small business applied.

Employer firm data from the SBCS are available for the nation as well as select states and Metropolitan Statistical Areas (MSAs). Within the Fifth District, data are available for Virginia, the Washington, D.C. MSA (which includes D.C. and parts of Maryland, Virginia, and West Virginia), and North Carolina.1 What do these data tell us about small business health and credit-seeking experiences last year? Broadly, Virginia, Washington, D.C., and North Carolina mirror national trends. This post tracks those trends and digs into a few notable differences.

Virginia: Somewhat Less Likely to Apply and Higher Use of Online Lenders

Firms in Virginia show relative financial strength with 54 percent of firms operating at a profit compared to 47 percent of firms nationally. Still, about one-third of Virginia small businesses are operating at a loss. Business owners in Virginia were optimistic that their revenues would increase through 2024.

Virginia firms were somewhat less likely to apply for traditional financing (31 percent compared to 37 percent nationally). Those that did apply were more likely than firms nationally to seek financing through an online lender (37 percent compared to 23 percent, respectively). Financing outcomes for Virginia firms were similar to U.S. financing outcomes, with about half fully approved, about a quarter partially approved, and about a quarter denied.

Washington, D.C. MSA: Revenue Hits and Discouragement for Some Firms

Like Virginia and North Carolina firms, around half of D.C. area respondents are profitable. A larger share of firms within the D.C. MSA experienced a revenue decrease in 2023 than firms nationally (50 percent compared to 39 percent). Looking forward, 26 percent of D.C. area businesses expected their revenue to decrease through 2024, whereas 19 percent of U.S. firms expected lower revenue. There are a variety of contributing factors that may help explain the lower revenue realizations and expectations for firms in the D.C. MSA. While the population in D.C. has increased since the pandemic, it has not returned to pre-pandemic levels. Furthermore, the share of workers working remotely is twice the national average, decreasing foot traffic within the city.

Firms in the D.C. MSA were about as likely as firms nationally to apply for traditional financing (35 percent compared to 37 percent). But there are some notable differences in the reasons that D.C. area respondents cited for applying and for not applying. Of the D.C. area firms that applied, 72 percent did so to meet operating expenses - notably higher than the 59 percent of firms nationally. A smaller share of D.C. area respondents (38 percent) sought financing to expand their businesses relative to the national data (46 percent). Among the firms in the D.C. MSA that did not apply for financing, 15 percent indicated that they did not apply because they were discouraged - about double the percentage of businesses nationwide (7 percent). Twelve percent of D.C. area firms are considered high credit risk compared to 6 percent nationally, which may contribute to credit access challenges and discouragement among nonapplicants.

North Carolina: Increased Debt and Somewhat Lower Approval Rates

In North Carolina, firms are somewhat more likely to be profitable, but they are also more likely to hold higher levels of debt than small businesses nationally. Forty-six percent of North Carolina businesses held more than $100,000 in debt, compared to 39 percent nationally.

North Carolina firms are also just as likely to apply for traditional financing as U.S. firms but face a higher denial rate (40 percent compared to 22 percent nationally). The higher denial rate for businesses in North Carolina may be partially explained by higher levels of existing debt. It may also be partially explained by the sources that these firms turn to for credit, specifically their higher use of large banks. North Carolina firms applied to large banks more than firms nationally (52 percent to 44 percent, respectively) while relying less on smaller banks. National SBCS data show that small banks and finance companies tend to have higher approval rates, while online lenders and large banks have lower approval rates.

Data Collection Continues

Even in a region that shares much in common with the national economy, there are state-level differences in small business financial conditions and credit experiences. The Federal Reserve Banks continue to track national and regional small business performance, and the next iteration of the SBCS will be open in fall 2024. Business support organizations and business owners can contribute to this important data collection effort: Sign up to become a distribution partner or to take the survey.

1

About 60 percent of the firms in the Washington, D.C. MSA sample are located in Virginia.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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