Small businesses often fail to grow, both in the United States and the European Union. What prevents them from growing? The Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia worked with the Small Business Credit Survey to help answer that question.
Small businesses often fail to grow due to a lack of access to credit, not a lack of desire, the study concludes. After the 2008 financial crisis, small businesses in the U.S. have been recovering at rate that is slower and more uneven than larger businesses. The slow and uneven growth can be attributed to four key findings in the report:
- Small firms and startups struggle to secure credit. Successful applicants are more likely have experience borrowing and are often larger (in terms of revenue and employees) and are more profitable.
- Firms are borrowing for expansion. Across businesses of all revenue brackets, the report found that expansion was a top reason for seeking credit.
- The credit application process is time consuming. Firms reported that they spent an average of 24 hours applying for credit.
- Large regional banks are the primary source of credit for growing firms. Startup businesses and growing businesses struggle more than large business to access credit.
While channels to accessing credit differ by region, access to capital is key for every business, both in and outside of the U.S. For example, a report by the African Development Bank found that in Africa bank financing accounts for only 8 percent of the capital in businesses with internal funds making up 84 percent of the investmentin small and medium enterprises.
To read more about trends in how businesses, click here to read the Joint Small Business Credit Survey Report.
Contributed by Emily Luepker.