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May 20, 2014

Where Do Young Firms Get Financing? Evidence from the Atlanta Fed Small Business Survey

During last week's "National Small Business Week," Janet Yellen delivered a speech titled "Small Business and the Recovery," in which she outlined how the Fed's low-interest-rate policies have helped small businesses.

By putting downward pressure on interest rates, the Fed is trying to make financial conditions more accommodative—supporting asset values and lower borrowing costs for households and businesses and thus encouraging the spending that spurs job creation and a stronger recovery.

In general, I think most small businesses in search of financing would agree with the "rising tide lifts all boats" hypothesis. When times are good, strong demand for goods and services helps provide a solid cash flow, which makes small businesses more attractive to lenders. At the same time, rising equity and housing prices support collateral used to secure financing.

Reduced economic uncertainty and strong income growth can help those in search of equity financing, as investors become more willing and able to open their pocketbooks. But even when the economy is strong, there is a business segment that's had an especially difficult time getting financing. And as we've highlighted in the past, this is also the segment that has had the highest potential to contribute to job growth—namely, young businesses.

Why is it hard for young firms to find credit or financing more generally? At least two reasons come to mind: First, lenders tend to have a rearview-mirror approach for assessing commercial creditworthiness. But a young business has little track record to speak of. Moreover, lenders have good reason to be cautious about a very young firm: half of all young firms don't make it past the fifth year. The second reason is that young businesses typically ask for relatively small amounts of money. (See the survey results in the Credit Demand section under Financing Conditions.) But the fixed cost of the detailed credit analysis (underwriting) of a loan can make lenders decide that it is not worth their while to engage with these young firms.

While difficult, obtaining financing is not impossible. Over the past two years, half of small firms under six years old that participated in our survey (latest results available) were able to obtain at least some of the financing requested over all their applications. This 50-percent figure for young firms strongly contrasts with the 78 percent of more mature small firms that found at least some credit. Nonetheless, some young firms manage to find some credit.

This leads to two questions:

  1. What types of financing sources are young firms using?
  2. How are the available financing options changing?

To answer the first question, we pooled all of the financing applications submitted by small firms in our semiannual survey over the past two years and examined how likely they were to apply for financing and be approved across a variety of financing products.

Applications and approvals
While most mature firms (more than five years old) seek—and receive—financing from banks, young firms have about as many approved applications for credit cards, vendor or trade credit, or financing from friends or family as they do for bank credit.

The chart below shows that about two-thirds of applications on behalf of mature firms were for commercial loans and lines of credit at banks and about 60 percent of those applications were at least partially approved. In comparison, fewer than half of applications by young firms were for a commercial bank loan or line of credit, fewer than a third of which were approved. Further, about half of the applications by mature firms were met in full compared to less than one-fifth of applications by young firms.



In the survey, we also ask what type of bank the firm applied to (large national bank, regional bank, or community bank). It turns out this distinction matters little for the young firms in our sample—the vast majority are denied regardless of the size of the bank. However, after the five-year mark, approval is highest for firms applying at the smallest banks and lowest for large national banks. For example, firms that are 10 years or older that applied at a community bank, on average, received most of the amount requested, and those applying at large national banks received only some of the amount requested.


Half of young firms and about one-fifth of mature firms in the survey reported receiving none of the credit requested over all their applications. How are firms that don't receive credit affected? According to a 2013 New York Fed small business credit survey, 42 percent of firms that were unsuccessful at obtaining credit said it limited their business expansion, 16 percent said they were unable to complete an existing order, and 16 percent indicated that it prevented hiring.

This leads to the next couple of questions: How are the available options for young firms changing? Is the market evolving in ways that can better facilitate lending to young firms?

When thinking about the places where young firms seem to be the most successful in obtaining credit, equity investments or loans from friends and family ranked the highest according to the Atlanta Fed survey, but this source is not highly used (see the first chart). Is the low usage rate a function of having only so many "friends and family" to ask? If it is, then perhaps alternative approaches such as crowdfunding could be a viable way for young businesses seeking small amounts of funds to broaden their financing options. Interestingly, crowdfunding serves not just as a means to raise funds, but also as a way to reach more customers and potential business partners.

A variety of types of new lending sources, including crowdfunding, were featured at the New York Fed's Small Business Summit ("Filling the Gaps") last week. One major theme of the summit was that credit providers are increasingly using technology to decrease the credit search costs for the borrower and lower the underwriting costs of the lender. And when it comes to matching borrowers with lenders, there does appear to be room for improvement. The New York Fed's small business credit survey, for example, showed that small firms looking for credit spent an average of 26 hours searching during the first half of 2013. Some of the financial services presented at the summit used electronic financial records and relevant business data, including business characteristics and credit scores to better match lenders and borrowers. Another theme to come out of the summit was the importance of transparency and education about the lending process. This was considered to be especially important at a time when the small business lending landscape is changing rapidly.

The full results of the Atlanta Fed's Q1 2014 Small Business Survey are available on the website.

Photo of Ellyn TerryBy Ellyn Terry, an economic policy analysis specialist in the Atlanta Fed's research department


May 20, 2014 in Economic conditions, Small Business | Permalink

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February 26, 2014

The Pattern of Job Creation and Destruction by Firm Age and Size

A recent Wall Street Journal blog post caught our attention. In particular, the following claim:

It’s not size that matters—at least when it comes to job creation. The age of the company is a bigger factor.

This observation is something we have also been thinking a lot about over the past few years (see for example, here, here, and here).

The following chart shows the average job-creation rate of expanding firms and the average job-destruction rates of shrinking firms from 1987 to 2011, broken out by various age and size categories:

In the chart, the colors represent age categories, and the sizes of the dot represent size categories. So, for example, the biggest blue dot in the far northeast quadrant shows the average rate of job creation and destruction for firms that are very young and very large. The tiny blue dot in the far east region of the chart represents the average rate of job creation and destruction for firms that are very young and very small. If an age-size dot is above the 45-degree line, then average net job creation of that firm size-age combination is positive—that is, more jobs are created than destroyed at those firms. (Note that the chart excludes firms less than one year old because, by definition in the data, they can have only job creation.)

The chart shows two things. First, the rate of job creation and destruction tends to decline with firm age. Younger firms of all sizes tend to have higher job-creation (and job-destruction) rates than their older counterparts. That is, the blue dots tend to lie above the green dots, and the green dots tend to be above the orange dots.

The second feature is that the rate of job creation at larger firms of all ages tends to exceed the rate of job destruction, whereas small firms tend to destroy more jobs than they create, on net. That is, the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line.

As pointed out in the WSJ blog post and by others (see, for example, work by the Kauffman Foundation here and here), once you control for firm size, firm age is the more important factor when measuring the rate of job creation. However, young firms are more dynamic in general, with rapid net growth balanced against a very high failure rate. (See this paper by John Haltiwanger for more on this up-or-out dynamic.) Apart from new firms, it seems that the combination of youth (between one and ten years old) and size (more than 250 employees) has tended to yield the highest rate of net job creation.

John RobertsonBy John Robertson, a vice president and senior economist in the Atlanta Fed’s research department, and

Ellyn TerryEllyn Terry, a senior economic analyst in the Atlanta Fed's research department


February 26, 2014 in Economic conditions, Employment, Labor Markets, Small Business | Permalink

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So young high growth firms that succeed create the most jobs. WOW!

Large successful old firms are stable and neither create nor destroy large amounts of new jobs. The analytical insight is unbelievable!

and to top if off small, risky start-ups destroy the most jobs as they constantly fail. OMG, Nobel Price of Economics right there!

Americans please send even more of your tax dollars to the Atlanta Federal Reserve given the amazing level of research and analytical insights they are capable of.

Posted by: Alex | February 27, 2014 at 01:46 AM

Are the highlighted features of the chart -- that "rates of job creation and destruction tend to decline with firm age" and that "the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line" -- stable over the time period examined, or do they come and go from year to year? And if the latter, can that change be correlated in a useful way with events in the economy as a whole (eg the "dot bomb" of 2001, the financial crisis of 2007-8, or the Great Recession to which that crisis gave rise)?

Posted by: Ed Blachman | February 27, 2014 at 09:29 AM

I keep thinking about the pattern and I wonder what it would look like if it was in motion through time. I wonder if it would follow patterns in nature. I also wonder if the large industries 4 years or less move around much since it is so unusual for a company to hire that many employees in such a short time because of outliers. I also wonder the implications for future employment levels as there are fewer entrepreneurs. Thank you so much for posting this. Great article. I've read other stuff you've done that you linked out to. Great job guys. You've found a lot of the critical data points that really matter. I've been looking to find something like this. I will bookmark this page.

Posted by: buttmunch1 | February 28, 2014 at 12:17 AM

One question: Would the chart look much different if you stopped at 2006? The idea is that large numbers of small firm jobs were likely destroyed by the financial crisis. Further, after the crisis small firms have lacked access to start-up funds, thus diminishing gross new firm creation (and its attendant jobs). One can think of the GFC as a seminal event in small firm birth/death dynamics, much more so than for large firms. While it may look from the data that small firms don't have much impact on net job creation, this may be because of the lack of small firm "births" in the past five years.

Posted by: Diego Espinosa | March 07, 2014 at 12:17 PM

The chart is better art than economics.

The obvious correlation between firm age and firm size means that it is impossible to separate the effects of the two factors (on job creation) by assigning colors and sizes to firms and graphing them against each other. The "cure" for multicollinearity is not changing the color or size of data points -- but recognizing that both change simultaneously.

A successful startup firm in 1987 moved along a path from then to 2011 that took them from tiny blue dots in the direction of giant orange balls. What does that PATH suggest about job creation and destruction? We can be certain that companies traveling the same path in the opposite direction have a far higher rates of job destruction to creation. Shall we paint both of them green, and assign both medium-size dots?

Finally, I was confused by the artist's practice of measuring dependent variables along both principal axes, then graphing observations for independent variables as points in the x-y plane. This is perfectly fine if the sole purpose is to describe the data in a compact way. But if one's purpose is to guide the reader's mind toward cause-effect relationships, this is a poor practice.

Posted by: Thomas Wyrick | March 08, 2014 at 10:05 AM

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November 15, 2013

Is Credit to Small Businesses Flowing Faster? Evidence from the Atlanta Fed Small Business Survey

The spigot of credit to small businesses appears to be turning faster. As of June 2013, outstanding amounts of small loans on the balance sheets of banks were 4 percent higher than their September 2012 levels, according to the Federal Deposit Insurance Corporation. While they are still 12 percent off 2007 levels, the recent increase is encouraging.

The turnaround in small loan portfolios is not the only sign of improved credit flows to small businesses. The Fed’s October 2013 senior loan officer survey indicates that credit terms to small firms have gradually eased since the second quarter of 2010. Approval ratings of banks and alternative lenders, as measured by Biz2Credit’s lending index, have also risen steadily over the past two years.

In addition to these positive signs, the Atlanta Fed’s third-quarter 2013 Small Business Survey has revealed signs of improvement among small business borrowers in the Southeast. The survey asked recent borrowers about their requests for credit and how successful they were at each place they applied. We also asked, “Over ALL your applications for credit, to what extent were you total financing needs met?” This measure of overall financing satisfaction showed some signs of improvement in the third quarter.

Chart 1 compares the overall financing satisfaction of small business borrowers in the first and third quarter of 2013. The portion of firms that received the full amount requested rose from 28 percent in the first quarter to 42 percent in the third quarter. Meanwhile, the portion that received none of the credit requested declined from 31 percent of the sample in the first quarter to 22 percent in the third quarter.

Chart 1: Overall Financing Satisfaction

Further, financing satisfaction rose across a variety of dimensions. Chart 2 shows how average financing satisfaction changed for young firms and mature firms, across industries and by recent sales performance. In all cases, there were increases in the average amount of financing received from the first to the third quarter of 2013.

Chart 2: Average Amount of Financing Received Overall

This broad-based increase in overall financing satisfaction is encouraging. Greater financial health of the applicant pool helped fuel the improvement in borrowing conditions. In the October survey, 52 percent of businesses reported that sales increased while 34 percent reported decreases. Sales have improved significantly from a year ago, when about as many firms reported sales increases as reported decreases. Measures of hiring and capital improvements over the year have also improved for the average firm in the survey (see chart 3).

131115c

Lending standards have been improving and small businesses have been slowly gaining momentum, but many obstacles remain. Open-ended questions in our survey revealed that small businesses are still concerned about a number of factors, including the general political and economic uncertainty, the impact of the Affordable Care Act, the higher collateral and personal guarantees required to obtain financing, and regulatory requirements that restrict lending. So while conditions on the ground seem to be improving for small businesses, there still appear to be headwinds that may be holding back a greater pace of improvement.

Read the full survey results.

Photo of Ellie TerryBy Ellie Terry, an economic policy analysis specialist in the Atlanta Fed’s research department


November 15, 2013 in Economic conditions, Small Business | Permalink

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The current news about healthcare has many small business owners wary about hiring, employee raises and compensation packages. While the renewal of existing healthcare policies is still goin on, the future cost and coverage will place an additional burden that has not been discussed. it will vacuum a large amount of money out of the economy that will go to government beauracracy that will not be available for our consumer driven economy. No one seems to realize that the additional cost, whether it comes from any generation/segment of the economy, will dampen the economic outlook. The trends reported are great signs that the economy is beginning to turn around but the headwind is healthcare and its uncalculated costs in the future. The press wants to focus on providing afforable care and fails to do an in depth job of getting to the real price that is being paid to create this illusion.

Posted by: George Kurz | November 18, 2013 at 09:03 AM

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October 04, 2013

Certain about Uncertainty

The Bloom-Davis index of Economic Policy Uncertainty hit 162 in September, up from 102 in August and the highest level seen since December 2012. With all this uncertainty, we can be certain that the events surrounding the government shutdown are having an impact.

This notion of increased uncertainty is captured nicely in our most recent poll of small businesses in the Southeast (past results available here), which went live on September 30, the day before the government shutdown. Although the survey is still out in the field, some early results show:

  • Most firms are expressing more uncertainty (see the chart),
  • For a significant portion of firms, uncertainty today is having a greater impact than six months ago, and
  • The government is heavily featured as a source of the uncertainty.

Macroblog_2013-10-04A

Of course, what we really care about is whether higher uncertainty is affecting economic activity. When asked, 45 percent of our respondents indicate that uncertainty is in fact having a greater impact on their business than six months ago, up from 37 percent in the first-quarter 2013 survey (relative to fall 2012). Further, fewer firms so far have indicated that uncertainty is having less of an impact. In the current survey, 9 percent of firms have reported less of an effect, compared with 16 percent at the close of last April's survey.

Macroblog_2013-10-04B

And what are the sources of uncertainty, as seen by our panel of businesses? Eighty-percent of participants have responded to our open-ended question about the primary source(s) of uncertainty. The following "word cloud" summarizes their views:


We will get more responses to the survey over the next week or so, and these may show a different picture. But we're pretty certain of one thing—the duration of the current fiscal impasse in Washington will make a difference.

John RobertsonBy John Robertson, vice president and senior economist, and

 

Ellyn TerryEllyn Terry, economic policy analysis specialist, both in the research department of the Atlanta Fed


October 4, 2013 in Economic conditions, Small Business | Permalink

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June 07, 2013

The Hiring Forecasts of Small Firms: Will the Pace of Employment Growth Pick Up?

The U.S. Bureau of Labor Statistics (BLS) announced today that the U.S. labor market added 175,000 payroll jobs in May, continuing a trend of steady but disappointingly slow employment growth. The employment recovery has been even slower among small firms. Will it pick up in the coming 12 months? Results from the Atlanta Fed's latest survey of small businesses in the Southeast suggest that employment growth among small firms will continue but not necessarily at a faster pace.

Since the recession began, changes in employment have been asymmetric across firm size. In contrast to large firms, employment at small and medium sized businesses began decreasing earlier, declined more, and, by last March, was a little further from its prerecession level. As of the first quarter of 2012, employment at firms with fewer than 500 employees was 5 percent below prerecession levels, compared to just 2 percent for firms with more than 500 employees. So why is employment at small firms not recovering as quickly as employment at large firms? Is it poised to accelerate and perhaps catch up?

Employment to Firm Size; Indexed to Q1-2008=1

While the Business Employment Dynamics data series from the BLS only go through first-quarter 2012 (chart 1), we can use our semi-annual survey of small business in the Southeast to find out a little more about the experiences of small firms through first-quarter 2013 as well look at their forecasts through the first quarter of 2014. Four-hundred-seventy-eight firms across the industry and age spectrum participated in the first-quarter 2013 survey, which was conducted during the first three weeks in April. Although the survey is not a random sample, the results are weighted to make them more representative of a national distribution.

When asked about changes in employment over the period Q1 2012 to Q1 2013, employer firms on net said there was almost no change. Slightly more than 40 percent of firms said they had not altered employment levels. The remainder of the responses were distributed pretty evenly between "expansion" and "contraction". As you can see in chart 2, the distribution of firms creating jobs was almost a mirror image of the distribution of firms shedding jobs in terms of the magnitude of change.

Changes in Size of Workforce--Q1 2012 to Q1 2013

In addition to asking about changes during the past 12 months, the survey probed small firms about their expectations for the coming 12 months. Using the power of our panel data set, we can compare the expectations of firms that took the survey exactly one year ago with their actual hiring activity during that time period to determine how accurately firms predict what the future holds and whether these hiring plans are indeed good forecasts of future activity.

As it turns out, the 184 firms participating in both surveys came pretty close to meeting their hiring expectations. However, they did tend to overestimate the extent to which employment would increase (or underestimate the extent to which it would decrease), regardless of how well firms were performing at the time they made their forecast (see chart 3). For example, firms that had recently experienced reductions in their workforce expected the greatest positive change in the pace of hiring, and in fact went on to report the highest actual change during this period. Firms that had not changed their employment levels recently or had changed them by up to 10 percent expected very little growth—on average, they achieved just slightly less than expected. Regardless of how well the firm had recently performed (in terms of employment growth in the previous period), the degree to which hiring increased or downsizing decreased was less pronounced than anticipated.

Actual Pace of Hiring and Expected Pace of Hiring

Small firms are reasonably good at predicting the direction and relative magnitude of their employment growth, but on average tend to overestimate. For this reason, it might be useful to examine changes in the hiring expectations index (as opposed to changes in the pace of employment growth) when trying to understand how the forecast of firms participating in the survey might translate into actual employment growth of small firms in the Southeast.

Chart 4 shows the hiring index of firms across four broad industry groups. In the first quarter of 2013, the index for hiring in the coming 12 months was essentially unchanged from the Q3 2012 survey, and significantly below that of the Q1 2012 survey. The only industry whose employment forecast was notably positive was the construction and real estate industry. Firms in that category have been steadily increasing their hiring forecasts since the third quarter of 2011.

MHiring Expectations Diffusion Index

The fact that hiring expectations did not improve in the first-quarter survey leads to another, perhaps more important question: Why didn't they?

One contributing factor that could be having a particularly large impact on hiring expectations is rocky sales. Firms may be less willing to hire if they are uncertain about the future or if they do not expect consistent sales growth. Indeed, by looking at the experiences of firms in the past 12 months, we can tell that there is a clear correlation between rising sales and rising employment. As chart 5 shows, half of employer firms reported a recent rise in sales, and the more sales had risen, the more likely firms were to have increased their workforce.

Change in Sales

A couple of questions that arise from chart 5 are: What about the firms that recently experienced sales growth but didn't hire? Are they planning to hire in the coming 12 months? About one-third of firms say "yes". One driving factor in that decision appears to be sustained sales growth; another is reduced uncertainty. As chart 6 makes apparent, the sales expectations of firms in this group is higher on average for the one-third of firms that say they do plan to hire in the coming 12 months than for the two-thirds who do not. All the firms in the hiring group also expect sales growth to continue, with the most common response being greater than 10 percent growth. In contrast, while 77 percent of firms in the not-hiring group anticipate sustained sales growth, the group’s most common response was lower than that of the hiring group: 1 percent to 5 percent.

Q1 2013 Sales Forecasts of Firms

Another factor that may be related to hiring is reduced uncertainty. Employer firms experiencing sales growth in the past 12 months are more likely to anticipate hiring if they perceive a decrease in uncertainty compared to six months ago. Seventy percent of firms that had a recent increase in sales and decreased uncertainty concerns relative to six months ago anticipate hiring in the coming year. In contrast, 46 percent of those who had experienced a recent increase in sales but also perceived heightened uncertainty anticipate hiring.

For now, the results suggest that uncertainty and rocky sales growth are negatively affecting the hiring plans of small firms and, unfortunately, that small firms are not likely to increase their rate of hiring in the next 12 months. However, if uncertainty eases and sales growth continues, small firms will likely revisit their hiring plans and the pace of hiring just might improve.

By Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department

June 7, 2013 in Data Releases, Employment, Labor Markets, Small Business | Permalink

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While expected "sales" may be a hender in hiring for small firms, the "Affordable Healthcare Act" is having a far more dramatic effect than anyone will admit. Why, is a mystery.

Posted by: Tom Damson | June 10, 2013 at 03:39 PM

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February 15, 2013

Promoting Job Creation: Don't Forget the Old Guys

In a provocative article posted this week, the American Enterprise Institute's James Pethokoukis concludes that the state of entrepreneurship in the United States is, disturbingly, weaker than ever. In particular, Pethokoukis documents a decline in jobs created by establishments less than one year old, a trend that began before the 2001 recession and has continued more or less unabated since. He specifically cites the following symptoms of trouble:

  1. Had small business come out of the recession maintaining just the rate of start-ups generated in 2007, according to McKinsey, the U.S. economy would today have almost 2.5 million more jobs than it does.

  2. There were fewer new firms formed in 2010 and 2011 than during the Great Recession.

  3. The rate of start-up jobs during 2010 and 2011—years that were technically in full recovery—were the lowest on record, according to economist Tim Kane of the Hudson Institute.

That last point appears to be all the more ominous given this observation from Tim Kane:

"...that startups create essentially all net new jobs. Existing employers, it turns out, tend to be net job losers, averaging net losses of 1 million workers per year."

Pethokoukis makes his case with political commentary that we don't endorse and don't find particularly helpful. But we won't argue with his conclusion that more entrepreneurial start-up activity would be a good thing. Nonetheless, we get a little concerned when the conversation jumps from data on net job creation and the role of start-ups and early life-cycle firms, and moves on to policy conclusions that seem to disproportionately focus on that class of businesses specifically.

Here is the source of our concern: Though it is also tempting to lump all "existing employers” into the basket of net job destroyers, there are existing firms that create jobs, and a few are doing so on a very large scale.

Take 2006, for instance. Based on data from the Commerce Department called Business Dynamics Statistics (BDS), new firms (businesses with a payroll that existed in March 2006 but not in March 2005) had about 3.5 million employees. This is the large net job creation by new firms reported by Kane. However, over the same year, expanding firms more than 10 years old added a whopping 11 million jobs—about three times as many jobs as created by new firms. Of course, some older firms were downsizing or closing—contracting mature firms destroyed an estimated 10 million jobs. So the net number of jobs created by older established firms looks somewhat less impressive than the record of those young start-ups. But in the overall picture, were the 11 million jobs created by the expanding older businesses really less important than 3.5 million created by the newbies?

It turns out that older firms also account for a large fraction of the job creation occurring in fast-growing firms, arguably a better characterization of entrepreneurism than newness. We found some compelling evidence reported in recent research by Akbar Sadeghi, James Spletzer, and David Talan. Using data from the U.S. Bureau of Labor Statistics' Business Employment Dynamics (BED), Sadeghi, Spletzer, and Talen find that older firms (those at least 10 years old) accounted for more than 40 percent of the employment created by high-growth firms (those with at least 20 percent annual employment gains between 2008 and 2011). A similar conclusion about the role of older, fast-growing firms is found in this earlier Kauffman Foundation report based on BDS data looking at the 1 percent of fastest-growing firms in the United States.

The point is not that start-up entrepreneurial activity is unimportant. It is vitally important. But in larger terms, we should recognize that all entrepreneurial activity is important, no matter what the age of the firm in which it occurs. Atlanta Fed President Dennis Lockhart highlighted this point in a speech delivered earlier this week at Instituto de Empresas in Madrid, Spain:

My bank's experience in trying to understand the role of small businesses, small-growth businesses, young businesses, and mature-growth businesses in job creation illustrates a key point, I think. In the pursuit of economic growth and increased employment, there is no silver bullet. Rather, the policy community should be pursuing an effective mix of policy elements (with focus in areas such as new business formation, labor rules, and regulatory efficiency, to name a few) that together catalyze a virtuous circle of innovation, growth, and employment.

Certainly, entrepreneurial risk-taking, whether by large, mature businesses or start-ups aimed at becoming growth companies, is part of the solution.

When it comes to promoting job creation, forgetting to throw mature businesses into the mix with start-ups is surely not the path to finding the best policy solutions.

Dave AltigBy Dave Altig, executive vice president, and



John RobertsonJohn Robertson, vice president and senior economist, both in the Atlanta Fed's research department

February 15, 2013 in Employment, Labor Markets, Small Business | Permalink

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I think that to a certain extent the decline in new business formation in 2010-2011 as opposed to 2009 is a bit of a statistical illusion for a couple of reasons.

First, a lot of the start ups in 2008 and 2009 reflect arangements that were first agreed to in 2007 or before--there is a delay between the time when the committment to start a new business is made and when the articles of incorporation are actually filed. Moreover, business cycles follow a bit of a learning curve--back in 2008 and most of 2009, people thought the recession was a lot smaller than it actually was, a misunderstanding that was cleared up with better data in 2010.

Second, there is an extent to which small and new businesses are an inferior good. New businesses typically specialize in smaller orders and attempt to undersell large established suppliers. At the height of the recession, customers downsized, switching from large established providers to small/new competitors in an effort to reduce spending. As the owner of one of these small businesses during the recession, it was definitely my experience that while the type of customers changed in 2008-2009, overall business was still up compared to 2007. That ended when, in 2010, customers started up-sizing again and went to the larger industrial suppliers, so that my business wasn't really hit by the recession until the recovery was in full-swing. If this is a common experience, then the data will show that small/new businesses fared better than large established business in 2008-2009, but then took a hit in 2010-2011.

Posted by: Matthew Martin | February 16, 2013 at 03:27 PM

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February 05, 2013

2013 Business Hiring Plans: Employment, Effort, Hours, and Fiscal Uncertainty

How much is fiscal uncertainty holding back hiring? The answer seems to depend on whom you ask. Early in January, the Atlanta Fed spoke to 670 businesses in the Southeast about employment. Conditional on the respondents’ 2013 hiring plans (expand, hold steady, or contract), the following set of charts summarizes the results for how the businesses viewed activity relative to their own interpretation of “normal” along three dimensions: their current employment level, the amount of effort required from their staff per hour, and the average hours worked per employee. These questions were modeled on questions asked in the Atlanta Fed’s December 2012 Business Inflation Expectations Survey. In the following three charts, the green bars represent firms that said they planned to expand employment in 2013. The grey bars represent firms that said they did not plan to change their employment level in 2013, and the red bars represent firms that planned to reduce employment in 2013.

The first chart shows the results for current employment. Regardless of hiring plans over the next 12 months, most firms said they were currently at or below normal employment levels. Those planning on increasing employment over the next 12 months were a bit more likely to say they have already surpassed normal levels of employment than other firms, while those looking to shed employees were very likely to say their employment level is below normal employment levels.

Macroblog_2013-02-05_number-of-employees

Chart 2 shows that businesses are generally pushing hard along the effort dimension. Firms were quite likely to say that their staff’s effort per hour worked was currently at or above normal,  whether or not they were planning to change employment in 2013.

Macroblog_2013-02-05_effort-per-hour

Chart 3 shows that firms planning to expand were very likely to say that average hours worked were at or above normal (28 percent said hours were above normal, 60 percent about normal), whereas firms planning to contract were more likely to say that hours were at or below normal (48 percent about normal, 39 percent below normal).

Macroblog_2013-02-05_average-hours-per-employee

Taken together, these results suggest that some firms are approaching the limit of how far they can go along the intensive margins of effort and hours before they have to hire more workers. With effort elevated, as more firms increase average hours worked to above-normal levels, one might expect more hiring to follow.

Each business was also asked how uncertainty about future fiscal policy was affecting its hiring plans. Firms planning to reduce employment tended to cite fiscal uncertainty as having a negative impact on their hiring plans. However, for those firms, hours also tended to be well below normal, so it is unlikely that removing fiscal uncertainty would move many of those firms into expansion mode (although it may help stabilize their outlook).

In contrast, fiscal uncertainty was generally viewed as having less impact by those planning to expand employment and those planning to hold employment levels steady. Presumably, reducing fiscal uncertainty would move some of the firms planning to hold steady into expansion mode, and those planning to expand would do so a bit more. To get some idea of this potential, Chart 4 shows the responses by firms who reported above-normal effort per hour and above-normal average hours worked. About 40 percent of those businesses said that fiscal uncertainty had caused them to scale back their hiring plans.

Macroblog_2013-02-05_effect-of-fiscal-policy

It is unclear whether eliminating fiscal uncertainty would have a big impact on the hiring plans of these firms. But these results suggest that it sure couldn’t hurt.

John RobertsonBy John Robertson, vice president and senior economist, and

Ellyn TerryEllyn Terry, a senior economic analyst in the Atlanta Fed's research department

February 5, 2013 in Employment, Labor Markets, Small Business | Permalink

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December 12, 2012

Anticipating Growth despite a Slowdown? Results from the Recent Small Business Survey

The latest reading on the Wells Fargo/Gallup's Small Business Index indicated business conditions for small firms dropped to the lowest levels since July 2010 (see the chart), and index also said:

Key drivers of this decline include business owner concerns about their future financial situation, cash flow, capital spending, and hiring over the next 12 months.

121212a

The latest iteration of the Atlanta Fed's small business survey, which was conducted in October, also noted a decline in 12-month-ahead expectations for sales, hiring, and capital spending (see the chart).

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Dissecting this by firm age, the overall decline in expectations stemmed from the firms in our sample that were more than five years old (see the charts).

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Over the life of the survey, young firms have tended to be more optimistic about changing business conditions. Are these young firms simply naïve about changing economic conditions, or are they anticipating growth despite expectations for a pullback in the broader economy? We asked the following question this time around in an attempt to capture the business owners' aspirations and job-creating "gazelle" potential:

Five years from now, do you anticipate your business will be:

a) Smaller
b) About the same
c) Somewhat larger
d) Significantly larger

It turns out the group is an optimistic bunch: 30 percent of employer firms said they thought their business would be significantly larger in five years, and firms under six years of age were twice as likely to say so (see the chart). Considering that young firms also tend to have smaller operations than mature firms (the median young firm had from $100,000 to $500,000 in annual revenues and the median mature firm had from $1 million to $7 million), this difference is not shocking.

121212f

What was a little surprising was how few of the young firms said they thought they would be smaller in five years. Research suggests that that only about half of businesses make it past five years, and yet only three young firms identified themselves as shrinking. There is always the chance that these young businesses will become fast-growing, job-creating gazelles. After all, a recent study of high-growth firms by the Kauffman Foundation found the average age of the fastest-growing firms in 2010 was only seven years old.

Will they achieve their goals? Only time will tell.

The Atlanta Fed's third quarter small business survey, which asks firms questions about business and financing conditions, is available on our website.

Ellyn TerryBy Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department

 


December 12, 2012 in Small Business | Permalink

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November 29, 2012

Gazelles, and Why They Matter

A gazelle, as you may recall from your favorite wildlife show, is one of those antelope-like animals that run around in herds across the plains and are known for their speed. Sheltered by the herd at birth, their youth is short-lived. In no time flat, gazelles are expected to be up and running or they will be easily devoured by hungry lions.

Probably because of that imagery, the word gazelle is also used in the business literature to represent a young firm that grows very quickly in a relatively short period of time. According to Kauffman Foundation research, the fastest-growing 1 percent of firms typically account for about 40 percent of job creation in the United States. Of that 1 percent, three-quarters are less than six years old. Research also shows that these high-growth young firms are more likely to provide solutions to other businesses than directly to consumers, have some form of intellectual or technological property, and tend to be started by entrepreneurs with business startup experience.

To learn more about the role of gazelles and the challenges they face, the Federal Reserve Bank of Atlanta recently hosted Amy Wilkinson, a senior fellow at Harvard University and a policy scholar at the Woodrow Wilson Center. Wilkinson is a leading entrepreneurship scholar. Her current research focuses on entrepreneurs who scale their company to reach $100 million in revenue in less than five years. (You can see her discussing the topic here.) She has shown that these "founders" tend to drive innovation, and ultimately job creation, in the U.S. economy. These young, high-growth firms are typically driven forward by entrepreneurs with high aspirations, novel ideas, and a strong support system. This support system is analogous to the gazelle's herd—it is a network of financial and human capital providers that help the businesses grow to potential.

To get a perspective on the key drivers and impediments to growth for high-growth-potential firms in the current economic climate, the Atlanta Fed also hosted an entrepreneur roundtable in November. The roundtable included founders of Southeast-based businesses in various stages of development, along with representatives of "the herd."

Many participants indicated that attracting capital in the Southeast has always been challenging, but it has been even more difficult in recent years. Investors in general are more hesitant to take on risk, and the market available for early-stage financing has shrunk. But the biggest impediment to growth in recent years has been the recession and the halting nature of the recovery. The Atlanta Fed's poll of small businesses has noted that business startups today are much more reliant on personal capital versus external capital than was the case for businesses started prior to the recession. The word "uncertainty" was also mentioned a lot, prompting even this group of risk takers to take a bit more conservative stance in their growth expectations.

On the topic of labor, many of these firms cited the importance of having the right talent in place to make a business successful. Participants noted that the person who starts a business is often not the right person to propel the business forward. Recognition of the correct timing of a leadership change and the ability to make hard decisions generally were deciding factors on whether a firm would continue to grow rapidly or plateau. The Kauffman Foundation also cited the important role of talent in its poll of fast-growing firms conducted last year.

Another theme of our recent conversations with entrepreneurs and business experts is the crucial role of the supporting herd in nurturing and enabling a young business to succeed. In building a business from the ground up, a first-time entrepreneur confronts a significant learning curve—from figuring out the tax code to securing financing. The business information and support networks that exist are evolving, but matching ideas to money to people is still not a straightforward process. To complicate things further, "the herd" is not a one-size-fits-all concept; it differs geographically and across industry. As highlighted in a recent Kauffman Foundation study, high-growth firms are more prevalent in some areas of the country, and there are hot spots for certain industries. One group working to make these connections stronger and more efficient is Invest Atlanta, the city of Atlanta's economic development agency. The agency recently launched Start Up Atlanta. The stated aim of Start Up Atlanta is to "…bring together and build Atlanta's entrepreneur ecosystem." Similar efforts are under way across the region.

Considering the significant impact that high-growth firms play in innovation and job creation, researchers at the Atlanta Fed continue to explore the various issues facing young, high-growth potential firms. If you are a small firm and are interested in contributing to this research, we would love for you to sign up for our semiannual poll of small business financing by sending an email to smallbusinessresearch@atl.frb.org.

Whitney MancusoBy Whitney Mancuso and

Ellyn TerryEllyn Terry, senior economic analysts in the Atlanta Fed's research department

 


November 29, 2012 in Small Business | Permalink

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We have to do whatever creates jobs

Posted by: Travis | November 30, 2012 at 11:07 PM

Agreed with Travis, You have to do something which creates jobs otherwise we will all be lost...

Posted by: Maz | December 05, 2012 at 12:51 AM

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October 04, 2012

Trends in Small Business Lending

The Atlanta Fed's latest semiannual Small Business Survey is active through October 22, 2012. If you own a small business and would like to participate, send an e-mail to SmallBusinessResearch@atl.frb.org.

In our previous survey conducted in April 2012, we found that firms applying for credit at large national banks had notably less success than firms that applied to small banks.

121003a

We also found that the firms applying to large banks tended to be much younger than the firms that applied to small banks. We speculated that this "age factor" could be contributing to the lower overall success rates at large banks.

A difference between small businesses' success at large and small banks has also been documented by the online credit facilitator Biz2Credit. Biz2Credit works a bit like an online dating service—after answering a series of questions (and providing the typical financial documents required by lenders), small businesses are presented with five potential "matches." To determine the best five matches, Biz2Credit identifies what lenders are looking for—usually a certain credit score, a minimum number of years in business, an established banking relationship, and targeted industries.

The resulting credit applications are the basis for the Biz2Credit Small Business Lending Index. Biz2Credit also reports approval rates from the matching process for large banks, small banks, credit unions, and alternative lenders. These approval rates are plotted on the chart below.

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Much like we saw in the Small Business Survey, Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.
Confirming our results encourages us that our April observation was a good one. But confirmation isn't explanation—what accounts for the different experiences small businesses have in securing credit from small banks versus big banks? And so, we dig deeper.

Note: According to Biz2Credit, its index is based on 1,000 of the 10,000-plus applications submitted each month. To be included, the business has to have at least a 680 credit score, be at least two years old, and have an established relationship with the bank to which it is applying. Selection methods are also applied to provide for national representation.

Photo of Ellyn TerryBy Ellyn Terry, senior economic research analyst at the Atlanta Fed

October 4, 2012 in Banking, Small Business | Permalink

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According to Biz2Credit, its index is based on 1,000 of the 10,000-plus applications submitted each month.

Posted by: jewelry supplies | December 05, 2012 at 04:53 AM

Much like we saw in the Small Business Survey, Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.

Posted by: badrum badkar | December 06, 2012 at 12:49 AM

To be included, the business has to have at least a 680 credit score, be at least two years old,

Posted by: Marvel War of Heroes hack | December 10, 2012 at 12:02 AM

Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.

Posted by: nursing training | December 13, 2012 at 05:10 AM

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