Updated Post 2/3/2011

NFIB is out with an updated report on the state of small business credit as of the end of 2010.  This is probably the most important annual report on small business credit that's produced in the United States right now because the Federal government doesn't have any meaningful ongoing monitoring of small business credit, a topic I have an editorial on in the forthcoming American Statistical Association magazine for February 2011.  NFIB's current report is notable on many topics but I wanted to highlight a few that might be lost in their importance.

• Forty-eight percent of small businesses attempted to borrow funds in 2010 while 3 percent of small business reported attempting to raise equity capital.  

Measuring attempts to get equity investments is very difficult and indeed we worked with NFIB on this question in their current survey.  So, here, I think it's important to recognized the sheer magnitude of difference between those who seek debt rather than equity in a given year but also to realize that this 3 percent estimate is very imperfect.  In my own opinion, equity investment questions are particularly open to differential reporting when asked in the very aggregate rather than by very specific categories/relationships.  

• "Almost one-quarter (24%) of small employers currently use credit cards and no other bank credit source. The overwhelming majority of this group does not appear interested in obtaining more credit."

The U.S. seems to be uniquely placed among countries in the proportion of small businesses using mainly credit cards for financing.  I am not surprised by this statistics but I thought their second conclusion that for a very specific group of business owners, credit cards are all that is needed and they are not seeking addition financing.

• The percentage of small employers applying for credit fell from 55 percent in 2009 to 48 percent in 2010. The percentage approved for credit rose somewhat, leaving about the same number accessing credit in 2010 as accessed it in 2009.

This is why these types of questions are important in a time series.  Even though the same number of businesses appeared to get credit there was a large shift in those applying.

• If an application for a line or a loan is rejected, it pays small business owners to try at a second or third institution. While the success rate declines with each successive institution approached, approvals appear high enough at fall-back institutions to warrant the effort. Beyond attempts at three institutions, success appears rare. Cards are different. Ninety-five (95) percent of apply- cants got one on the first attempt or did not get one at all.

This last point was interesting I thought particularly for small business owners.  I don't know of an other place that gathers information quite like this.  

Original Post 6/10/2009

Today, Kauffman is hosting a conference in New York discussing "Financing the Entrepreneurial Recovery."  Although I am not attending, I thought it would be helpful to highlight the topic of finance and survey questions and some example survey questions which are being used by the National Federation of Independent Businesses (NFIB) to track small business financial conditions.  Let us start with an extract from June 2009 Small Business Economic Trends on the credit markets:

Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Cash conservation is a top priority in uncertain times. In addition, the credit worthiness of many potential borrowers has deteriorated in the recession, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards). Twenty-eight (28) percent reported all their borrowing needs met (down two points) compared to nine percent who reported problems obtaining desired financing (up one point; not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell 3 points to 19 percent. The percent of owners reporting loans harder to get rose to 16 percent of all firms, the highest reading since the 1980-82 recession period. So, it appears that as the recession drags on, financing becomes more difficult to arrange. But only 5 percent of the owners reported “finance” as their #1 business problem, up a point from April, but statistically unchanged for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be “harder” to arrange financing), 3 points worse than the April reading.

While the actual results here are very interesting and nuanced, let's turn to the questions used to gather this information.  I am very thankful to Denny Dennis at NFIB who was nice enough to pull these questions for me for some research we are doing for an upcoming OECD-Kauffman workshop.  

• 18.  If you borrow money regularly (at least once every three months) as part of your business activity, how does the rate of interest payable on your most recent loan compare with that paid three months ago?  1. Much higher 2. Higher 3. Same  4. Much lower  5. Lower  7. Inapplicable, do not borrow regularly          
  
• 18a. Are these loans easier or harder to get than they were three months ago?  1. Easier  2. Same  3. Harder  4. Don't know
• 18b. Do you expect to find it easier or harder to obtain your required financing during the next three months?  1. Easier  2. Same  3. Harder  4. Don't know
   

I like this set of questions but did want to point out that there are only a few small businesses which regularly enough borrow money to answer this question.  I looked quickly at a similar question we asked of the Kauffman Firm Survey population (new businesses in 2004) and found only about 12 percent reported applying for new or renewed loans or lines of credit in calendar year 2007.  I don't see in the report the percentage of all small businesses which actually applied in the last three months but have to imagine it is biased towards the bigger firms in the sample.

• 19. If you borrowed within the last three months for business purposes and the loan maturity was 1 year or less, what interest rate did you pay?  __________ % or Prime + ___________

This question appears to show a real drop in interest rates paid relative to previous years which would seem to make sense.  The wording to this question would seem to capture a larger share of firms.

• 20. During the last 3 months was your firm able to satisfy its borrowing needs?  1. Yes  2. No  3. Did not want to borrow

We asked a similar question in the Kauffman Firm Survey this year but worded differently, "During calendar year 2007, was there any time when [NAME BUSINESS] needed credit, but did not apply because you or others associated with [NAME BUSINESS] thought the application would be denied?"  The two questions actually look at slightly different things, satisfaction of borrowing needs vs. needing credit but not applying.  It'd be interesting to understand how firms interpretted both questions.  On a quick read, NFIB's question seems a broader and worded in a way which I suspect respondent firms would respond better. 

• 25. Compared to three months ago: c. Is trade credit, that supplier financing of purchases:  1. Easier to get  2. Harder to get  3. No change  4. Never use trade credit

I don't know much about trade credit but have heard this reported in Europe as a real issue of concern.  

• 3.  What is the single most important problem facing your business today?  (Please circle only ONE of the following.)  4. Financing & interest rates

Intereestingly, this question peaked in mid-2008 and now remains quite low in comparison to other options (namely sales).  Their response categories for this set of questions appears fairly complete and has shown some huge movements in the last year or two.

• 7. Were your net earnings or "income" (after taxes) from your business during the last calendar quarter higher, lower or about the same as they were for the quarter before?
• 7a. If higher or lower, what is the most important reason?  (Circle only ONE.)  6. Financing costs

Wow.  This is such a diverse array of questions with seemingly something for everyone.  Unfortunately, NFIB doesn't go back to the same firms over time so we can only get these index type of questions.  It'd be great for research purposes if they were able to do more of a longitudinal sample if only for a year.  

Where do you place your confidence?  Government, private business, newspapers?  Gallup has an annual Confidence in Institutions Index which has been tracking a very similar question back to the 1970s.  Today they released an update for July 2010.  While the headline numbers are mostly about confidence in Congress (ouch - 11 percent) and the Presidency (down 15 percent in a year), what always strikes me in this research is how difference small business and big business are rated.  In 2010, when asked "Now I am going to read you a list of institutions in American society.  Please tell me how much confience you, yourself, have in each one -- a great deal, quite a lot, some, or very little?," the second highest response in terms of confidence was small business with 66 percent while big business was scraping near the bottom with 19 percent confidence.

In a survey of youth in 2007 (and actually in earlier iterations), we ask a somewhat similar question, "How much do the following help make your community a better place?"  More details on the survey available online but I don't think we published these tables broadly.

	A lot	A little	Not at all
Small Business	32%	59%	9%
Big Business	22%	57%	22%
Government	19%	57%	24%
Individual People	55%	40%	5%

We are in the field with an update to this youth survey so we'll see how some of these things have changed among America's youth in the last three years.  In comparing the two questions and populations, it's interesting to see the only group the youth tended to have different views of in comparison to ther others is the role that individual people play in making their community a better place.  While I realize the phrasing of the two questions is different - confidence vs. making community a better place - I would argue that the two questions really are trying to get at similar things.  While Gallup doesn't include individuals in their categories (as they really aren't institutions), it looks to me on reading that some of the confidence that adults might have in small business is really a confidence in the power of individuals.  Additionally, it looks like the conception of small business being different from big business is something which must emerge after youth.  

I had a great conversation with Carol Corrado at the Conference Board last week in the neighborhood of this topic that was sparked by a Business Week article and some responses from colleagues/grantees at Kauffman.  I'm not going to jump into that full discussion but the thing I did want to raise with my post here is that there is no doubt that both small and big business play important roles in the U.S. economy, indeed wealth creation can only come through private businesses.  Carol's point, I think, was that we really don't have a fully-conceptualized picture of the roles, particular how big business is often supportive of small business.  I won't dispute that (and I hope our data infrastructures and conceptualizations can continue to advance so that these questions can be quantified).  But the polling continues to show the picture people get when thinking about the little guy is very different than when thinking about big business. 

As a follow-up to my post yesterday on current trends in entrepreneurship in the U.S., I wanted to highlight another new report available - the Survey of Business Owners (SBO) 2007.  While this is not a particularly timely report, it is a deep report, bringing us our best snapshot of U.S. businesses by demographic once every five years.  While the SBO has a varied release schedule for reports with many more forthcoming, what came out recently was new data on ownership by gender and race.  My reaction to the report would fall very close to my colleague Alicia Robb's, which was summarized in a recent Business Week article - it's great to see some growth in the numbers of businesses but extremely troubling to see where the growth is occurring and the many areas of continued lag.


Source: http://www.businessweek.com/smallbiz/content/jul2010/sb20100716_503885.htm

This graphic from Bloomberg captures two things in particular 1) we are seeing growth in numbers of minority businesses, almost all in non-employer businesses and 2) the growth in minority-business ownership is dwarfing growth in non-minority firms.  BUT staggering levels of discrepancy in terms of lacking larger minority-owned businesses remains mostly intact.  In other work from the Kauffman Index, we have shown that the nature of those entering entrepreneurship has changed greatly in the last decade, partly by propensity and partly by changing population demographics.  The SBO report doesn't get into the changing population demographic, which I suspect is driving the change in the Hispanic numbers in the report but can't be seen as a driver of the large increase in Black-owned businesses.

As for trends with women-owned businesses, in 2007, there were 911,285 women-owned employer firms with 7.6 million persons employed and total payroll of $218.1 billion.  This is an increase of 6.2 percent and 25.7 percent respectively from 2002. This compares to 3.2 million men-owned employer firms that employed 41.6 million persons with a total payroll of $1.5 trillion.  I hate to be a pessimist but given how integrated, educated, and a part of all economic life that women are today, these are numbers that have to change faster.  There is no reason we should still be seeing women's employer businesses averaging 8 employees while male-owned firms are averaging 13 employees.

The Census Bureau now has within its grasp the data infrastructure to produce annual data updates on these statistics of business owners by demographic.  It absolutely should do so.  Without more frequent updates on these trends I fear efforts to create more minority and women's employer businesses will never gain traction.  There remains a great deal of untapped economic potential in the disparate levels of minority and women's businesses. 

The Challenger Job Market Index, a quarterly survey of approximately 3,000 job seekers, was out today with some new info on 2010 transitions into entrepreneurship.  It is surprising in that it reports a sizable decline in entry into business ownership in the first half of 2010, with only 3.7 percent of their sample opting to start their own business (down from 7.6 percent in the first half of 2009 and 9.6 over the last two quarters of 2009).

The natural question here is what does this all mean when put up to other statistics currently available?  Certainly a decline like this is not a positive development since it shows about the lowest rate of start-up activity in this survey since Challenger began collecting it (see related post by a colleague showing historic trends).  But at a time when job seekers are seeing record lengths of long-term unemployment and are likely very financially constrained, I can’t say that I am entirely surprised to see a decline in the percentage of the unemployed who are seeking other forms of employment besides starting their own business.  I think the press release from Challenger rightly identifies some of the opportunities this group might be facing as hiring has eased with existing employers and things like the credit crunch in lending. 

But do we expect to see a drop of half in the rate of new business formations in 2010?  No.  The latest data we have from the Kauffman Index which goes through December 2009 shows increasing rates of households reporting entry into entrepreneurship and as we’ve been documenting in other recent reports, many rates of entrepreneurship seem to be extremely steady.  What I wouldn’t be surprised to see in new data coming out on 2009 and 2010 is a moderate decline in employer business formations.  I expect these declines looking at trends from the Bureau of Labor Statistics or other not yet published leading indicators collected by the World Bank.  But a 50 percent decline has never been seen in government data collected on this topic in the United States. 

There is little doubt that when taken on the whole that there is an increase in necessity entrepreneurship and a possible decline in opportunity-driven entrepreneurship in the U.S. currently.  We’ll continue to look into these things more in the coming months in new papers in our Kauffman series on this topic, but the real question which we can’t answer currently is if there are new transformational companies being born today, as my colleague Dane Stangler has shown has occurred in past downturns. 

I’ll just end with a call for all my federal statistical agency colleagues to redouble the effort to get some more timely indicators on new business formation.  BLS currently leads the way with their BED and CPS-based statistics but I know Census is considering some new monthly measures and I suspect something similar might be possible at BLS. 

Today we released the 2009 Kauffman Index of Entrepreneurial Activity.  This piece is important because it is the earliest indicator we have of how the composition of who is becoming an entrepreneur is changing.  Given the recession, the 2009 numbers are particularly of interest.  As a quick background, the Kauffman Index measures entrepreneurship as the percentage of the adult, non-business owner population that starts a business each month, thus the Kauffman Index captures all new business owners, including those who own incorporated or unincorporated businesses, and those who are employers or non-employers. 

You can find more of an overview of the findings on the main Kauffman website, but 2009 is notable in that it does show the highest index rating for the U.S. generally, African-Americans, and men.  But rather than regurgitate what we have released there, I wanted to post a few additional tables that I found very interesting showing the composition changes over time of who is becoming an entrepreneur.  So here Rob Fairlie (the study's author) and I have applied the Kauffman Index rates of entry for the different demographic groups to the Current Population Surveys weights for these populations over time.  This isn't information we focus on in the current report but I do think we might add it in next year as we only really went down this route in the last few days.

	Ages 20-34	Ages 35-44	Ages 45-54	Ages 55-64
1996	35%	27%	24%	14%
1997	35%	28%	21%	16%
1998	34%	29%	21%	16%
1999	33%	30%	22%	16%
2000	29%	27%	26%	18%
2001	30%	27%	25%	18%
2002	29%	28%	26%	17%
2003	26%	30%	25%	19%
2004	30%	26%	24%	21%
2005	31%	25%	23%	20%
2006	28%	25%	27%	20%
2007	28%	26%	27%	19%
2008	28%	25%	26%	21%
2009	25%	27%	26%	23%

	White	Black	Latino	Asian
1996	77%	9%	11%	4%
1997	77%	9%	11%	3%
1998	78%	8%	11%	4%
1999	75%	10%	11%	4%
2000	74%	11%	12%	3%
2001	73%	10%	13%	5%
2002	73%	11%	12%	4%
2003	70%	9%	16%	5%
2004	72%	9%	15%	5%
2005	71%	10%	14%	5%
2006	70%	10%	15%	5%
2007	67%	9%	18%	5%
2008	65%	8%	21%	6%
2009	66%	10%	19%	5%

	Native-Born	Immigrant
1996	86%	14%
1997	87%	13%
1998	86%	14%
1999	85%	15%
2000	84%	16%
2001	84%	16%
2002	82%	18%
2003	81%	19%
2004	79%	21%
2005	82%	18%
2006	80%	20%
2007	76%	24%
2008	74%	26%
2009	76%	24%

	Less than High School	High School Graduate	Some College	College Graduate
1996	17%	33%	27%	23%
1997	17%	31%	28%	24%
1998	15%	33%	26%	26%
1999	14%	33%	27%	27%
2000	16%	33%	28%	24%
2001	14%	30%	25%	31%
2002	14%	31%	25%	29%
2003	17%	29%	26%	28%
2004	14%	29%	27%	30%
2005	16%	29%	28%	28%
2006	14%	29%	28%	29%
2007	15%	28%	24%	32%
2008	16%	31%	24%	29%
2009	16%	31%	23%	30%

So, what we see here is that partly because of changing propensities to enter entrepreneurship (the Kauffman Index) and partly because of changing demographic patterns of the labor force that new entrepreneurs are getting older, more educated, less white and more likely to be immigrants.

Kauffman Index microdata for 2009 will be made available in the next couple of months.  Currently, microdata is available through the website through 2008. 

The National Federation of Independent Businesses (NFIB)'s Index of Small Business Optimism is out for February 2010 and showed a small drop in optimism among business owners.  Even more depressing than a one-month lull is the fact that the index has remained below a level of 90 for its longest period ever.  Read more from the Wall Street Journal or on the NFIB website. 

In a new report just released today, the Kauffman Foundation (with leadership from Rob Fairlie) partnered with Fortune Small Business to examine the best places to launch a company in the United States.  Growing economies, affordable workers, stable housing markets, and low crime are just some of the features that led to the top cities in the list:

1.    1. Oklahoma City
2.    2. Pittsburgh
3.    3. Raleigh
4.    4. Houston
5.    5. Hartford
6.    6. Washington, D.C.
7.    7. Charlotte
8.    8. Austin
9.    9. New York City
10.   10. Baltimore

Fortune Small Business has developed a lot of online content to supplement this release including lots of data listings which will be of interest to many. 

The Alliance for Science & Technology Research in America (ASTRA) has released a new tool aimed at allowing regions in the United States to compare innovation locally to other regions.  After some initial concern, I have corresponded about the tool with ASTRA's Vice President for Research, Robin Gaster.  Robin explained, and should be updating the website, that this was a demonstration project and data hasn't been updated in two years.  With that, on the positive, the interface is flexible at letting you create custom reports comparing different regions.  On the negative, I have had some difficulty in navigating their interface, particularly in finding details such as what the source data is for a particular variable.  As such, I am going to comment on one component of their index, firms and establishments, which are listed as outputs of the innovation process.

For the firms and establishments component, ASTRA appears to use the following data (although I can't find series names, in most cases the actual series are obvious because of limited data availability on the topics):

• Nonemployer firms - number, Published: 2005      
• Nonemployer firms - receipts, Published: 2005    
• Business closings (% of all firms), Published: 2005    
• New companies per 1000 workers, Published: 2005    
• Firms by state - 0 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 0000 (although this is what they state it must be a mistake)  
• Firms by state - all firms - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002)     
• Firms by state - 100-499 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002) 
• Firms by state - 10-19 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002)  
• Firms by state - 1-4 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002)  
• Firms by state - 20-99 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002) 
• Firms by state - 5-9 employees - 1995-2002 Firm Size Data by State and Metropolitan Statistical Area, Published: 1999 (although this is what they state it must be a mistake since data is through 2002) 
• Business bankruptcies by state Department of Justice, Published: 2006    

I am troubled that regions will not heed Robin's warning and take this data as demonstrating what they can pull because in most cases the data presented are several years out of date.  On all the state level firm size data, much better information is available from the Small Business Administration, Office of Advocacy, in most cases going through 2006.  Nonemployer statistics should be available through 2006 or 2007.  And relatively recent data available at the state level which should allow for tracking of business dynamics patterns from Census or the Bureau of Labor Statistics don't seem to be considered. 

Thus I see this Regional Innovation Index tool as a good exploratory tool on the types of data one might consider in evaluation innovation at the regional level but users should realize that new data developments are not included here.  . 

We released the 2008 State New Economy Index in November but U.S. News and World Report just posted a nice article and more importantly an interesting map which I found convenient for comparing the State New Economy Index to the Small Business Survival Index.

Article: http://www.usnews.com/articles/business/small-business-entrepreneurs/2009/01/05/a-guide-to-the-50-states-and-the-new-economy.html

Map: http://maps.google.com/maps/ms?ie=UTF8&hl=en&msa=0&msid=107697047391144859556.00045d02aa11cf09e22cf&ll=37.996163,-96.767578&spn=46.525745,77.34375&t=h&z=4