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November 18, 2011

Job creation by small firms: Age matters

Talking about the role of the average or typical small business in job creation is problematic. Discussing it is challenging because job creation is highly skewed along the age dimension of small firms. This point was driven home in a nice presentation (featuring the chart below) by John Haltiwanger at last week's small business conference cosponsored by the Atlanta Fed, the Board of Governors, and the Kauffman Foundation.


The chart shows the 90th and 10th percentiles of the employment-weighted job growth rate distribution by firm age (in years). The fastest-growing firms are the 90th percentile (in purple) of the growth distribution, and the fastest-shrinking firms are the 10th percentile (in green). The data are from the Census Bureau's "Business Dynamics Statistics" (for example, here is a related presentation by John Haltiwanger, Ron Jarmin, and Javier Miranda).

As the chart makes clear, the fastest-expanding 10 percent of young firms grow extremely rapidly. While the fastest-growing 10 percent of older firms also expand at a good clip, their growth is much slower than that of their younger-firm counterparts. Note that these are employment-weighted growth rates, so the outsized growth of fast-growing young firms is not an artifact of having a lot of firms with one employee simply doubling in size by hiring an additional worker. Firms that are contracting the most (shown in the 10th percentile) also are skewed along the age dimension, although the differences are not as dramatic.

These differences by firm age are a reason why we at the Atlanta Fed have tried to make our poll of small businesses more representative of the age distribution of firms and have recently been separately featuring the results for young and more mature businesses.

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

 

November 18, 2011 in Employment, Labor Markets, Small Business | Permalink

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Are those ages in years? It would be nice to show the units on the graph, or mention them in the post... Maybe I missed it?

Posted by: eric | November 20, 2011 at 04:50 PM

All new firms are small. So, small is important. New firms did not fire 8 million people, existing firms did. There is no job growth unless there is population growth, that's why small firms create most new jobs, just a proliferation of the existing types of firms. The problem today is that existing firms are not fully staffed and we built too many in the boom. If existing firms were staffed up to their pre-2008 levels, the job situation would be much better. New firms can add to that, but at new jobs per NEW firms, we'd need 1.5 million to be added to the existing 6 million employers to re-employ those who lost their jobs. not likely

Posted by: Dunkelberg | December 21, 2011 at 08:50 AM

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November 10, 2011

Bank lending to finance a business start-up

On Wednesday and Thursday of this week I attended a conference titled "Small Business and Entrepreneurship during an Economic Recovery," presented by the Federal Reserve Board of Governors, the Federal Reserve Bank of Atlanta, and the Kauffman Foundation.

The conference agenda and papers are available here. Atlanta Fed President Dennis Lockhart gave one of the keynote addresses. His topic was business start-ups, job creation, and the role of banks.

Echoing the findings of research conducted by the Kauffman Foundation and others (for example, here and here), President Lockhart highlighted the vitally important role that business start-ups have played as job creators in the U.S. economy. He also made a distinction between true small business start-ups—those that intend to be small-scale operations (usually with single location and no more than a handful of employees), and growth-oriented start-ups. Both types of start-ups play a role in job creation, but the biggest impact over time comes from successful high-growth start-ups.

"Whether they're so-called 'mom-and-pops' or 'gazelles,' they create some jobs at inception. Inherently small enterprises either fail or sustain operations, but tend to level off in terms of employment. The growth businesses ramp up creating initial employment. They may fail in time, or they may grow to what is still small scale and level off, or they may break out and grow to large scale.

"A 2010 Kauffman Foundation study shows that just 1 percent of employer businesses—those growing the fastest—generate roughly 40 percent of new jobs in a given year. Three-quarters of those businesses are less than five years old."

So, if having a sufficient pipeline of new businesses is important to overall job creation, and especially enough start-ups with high growth potential, what is the role of banks as providers of financial capital to new business ventures? Because a new business is an inherently risky proposition, banks tend to provide a start-up loan only when it can be sufficiently collateralized. That collateralization often means using nonbusiness-related assets such as personal real estate. As President Lockhart's notes:

"The most prevalent form of hard collateral is real property. Start-up entrepreneurs often hear, 'If you'll put up your house, we'll lend to your new business.' Real estate related to the business—to the extent the entrepreneur needs such and actually owns it—can be problematic as collateral because its value may be a function of the business cash flow it helps generate."

The results of Atlanta Fed's most recent poll of small business credit conditions in the Southeast are consistent with the view that the combination of weak economic conditions and lower real estate values since 2006 has significantly reduced access to bank loans as a source of start-up capital. One of the questions in the poll asks: "When you started the business, what sources of financing did you use?" We are able to separate the answers from owners of mature businesses (those starting more than five years ago) and younger businesses (those starting in the last five years). The findings are summarized in the following chart.


Although the sample size is pretty small, I found the results to be quite striking. The younger businesses we talked to were much less likely to have used a business loan or line of credit from a bank when they started than their more mature counterparts. Instead, these younger businesses were more likely to have used personal savings or some other source. Almost certainly, these differences between older and younger firms are not simply because young entrepreneurs suddenly didn't want to get start-up financing from a bank.

There's obviously still a lot to learn about the business creation process, including the financing of new business ventures in today's economic and financial environment. I believe it's important that these topics are moving up in the list of national priorities and that the body of research dedicated to them, as evidenced at this conference, is growing.

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

 

November 10, 2011 in Economic Growth and Development, Employment, Labor Markets, Small Business | Permalink

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>what is the role of banks as providers of financial capital to new business ventures?

The answer is 'none'. That's risk capital's job. Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Sorry, I forgot--post-Glass-Stegall, that's exactly what happened. I guess you're right, if JPMorgan can put up its $900B in retail accounts as collateral to support its $99T derivatives positions, why can't they make uncollateralized loans to new businesses backed by "good ideas"?

Posted by: Dan Nile | November 19, 2011 at 09:03 AM

Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Posted by: Franchising Advice | December 28, 2011 at 02:23 PM

Banks are always accessible since they are used regularly for depositing savings or withdrawing them. After being bank customers for years, the bank becomes convenient and familiar, and personalized service makes it the first place to consider for a loan.

Posted by: Bank Lending Criteria | May 03, 2012 at 07:51 AM

Banks could be the back up of a business if they suffer from a financial issue for their business especially in business funding.

Posted by: Confidential Invoice Factoring | May 08, 2012 at 11:40 PM

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August 18, 2011

The new firm employment puzzle

Last week, John Bussey of the Wall Street Journal identified some discouraging statistics from the U.S. Bureau of Labor Statistics "Business Employment Dynamics" (BED) program concerning the number of new establishments (a specific physical location like a store) and the number of jobs from new establishments. These data are replicated in the following chart, which shows both a steep decline in the number of establishments over the last few years but also a decade-long trend of a declining number of jobs coming from new establishments.

BED New Establishment Data Annual

Not only has the number of new establishments declined, but the average size of new establishments has also tended to decline over time.

BED New Establishment Data: Average Size Annual

If small businesses, or more specifically new small businesses, are an engine of job growth in the United States, that particular engine has been getting less powerful. Between March 2009 and March 2010, new establishments generated 1 million fewer jobs than over the period from 2005 to 2007. About 85 percent of that decline was related to a reduction in the number of new establishments. The other 15 percent was attributable to the smaller average size of those new establishments. In contrast, the 1 million fewer jobs per year coming from new establishments between the years 2000 and 2005 were all attributable to a decline in the size of the establishments—the number of new establishments per year actually rose slightly over that period.

The BED program also maintains a quarterly series on establishment births (the annual data are for the year ending in March). The quarterly data show that the number of new establishments rebounded over the latter half of 2010 to a pace comparable to the late 1990s. But the associated number of jobs did not increase proportionately.

BED New Establishment Data Quarterly

So while there appears to have been a healthy pick-up in the number of new establishments in late 2010, the gradual march toward ever-smaller new establishments seems to be continuing.

The changing industrial composition of the economy doesn't seem to be the explanation for the declining establishment size trend—the pictures look basically the same if sectors such as manufacturing and construction are excluded. Perhaps it is that new establishments are simply more able than older establishments to adopt new technologies and processes that reduce the demand for labor because they have no legacy employment or capital to deal with.

How robust are these findings? The BED data do have some drawbacks. For example, the BED data are extracted from the administrative unemployment insurance records for businesses that have payrolls (employees). This covers the vast majority of workers in the United States (about 98 percent of employees on nonfarm payrolls and 94 percent of total employment) but not the majority of businesses (U.S. Census Bureau figures for 2006 report that there were about 3.5 times as many firms without employees other than the owner(s) than firms with employees). Also, these data do not distinguish between a new location that is part of a new firm and a new location that is part of a larger multi-establishment firm (like a national chain).

The Census Bureau maintains a related, but different, data set—the Business Dynamics Statistics (BDS)—that allows distinguishing between new firms and new establishments. However, the latest publicly available data only go through the year ending March 2009. The BDS data for new establishments from new firms and the jobs from those new establishments are shown in the next chart. Like the BED data, the BDS new firm data show that the number of new establishments peaked in 2006 and has been trending lower since.

Number of New Establishments

However, the two data sources differ in terms of job creation: the BED new establishment employment data peaked in 1999 and has been declining steadily since, while the BDS new firm employment data peaked in 2006 and was relatively stable prior to that.

Number of Jobs at New Establishments

Compared to the BED data, the average size of new establishments from new firms in the BDS data has changed relatively little over time—the swings in the number of establishments and employment in the BDS data move about in proportion to each other.

Average New Establishment Size

Interestingly, the BDS data on the average size of new establishments at firms of all ages (new firms as well as older firms) appears to be more cyclically sensitive than the new firm data, suggesting that older firms respond more to prevailing economic conditions than new firms do. Neither of the two BDS series displays the secular trend apparent in the BED data over the last decade.

Why do inferences about new establishments from the BED and BDS data differ? I don't know. This 2009 paper by U.S. Bureau of Labor Statistics economists Akbar Sadeghi, James Spletzer and David Talan tries to reconcile the differences but concludes that a definitive answer would require linking the data series together to compare the measures for matched establishments.

There is plenty of scope for investigating the dynamics of new business formation using data at a U.S. Census Bureau Research Data Center (RDC). The newest RDC will be located at the Atlanta Fed, which has partnered with six other research institutions to apply for and be approved to operate the 13th RDC location in the United States. The Atlanta Census Research Data Center will be a secure location where approved researchers will have access to restricted microdata in order to investigate questions like these. The Atlanta RDC is scheduled to open in September. For researchers in the Southeast interested in exploring research opportunities at the Atlanta Census Research Data Center, contact Melissa Banzhaf. For more information about U.S. Census Bureau Research Data Centers, and the Atlanta Census Research Data Center in particular, see here.

Update: Hat tip to Jim Spletzer at the Bureau of Labor Statistics, who pointed me to this paper by E.J. Reedy and Bob Litan, which was published by the Kauffman Foundation in July. Reedy and Litan show similar patterns in the aggregate BLS and BDS data, as I do, and also demonstrate that the shrinking size of new establishments is not made up for in later life. New firms are getting smaller on average and tend to stay smaller over their life. They posit as explanations increased firm-level productivity and shifting occupational needs related to increased use of information technology and increased globalization.

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

August 18, 2011 in Employment, Small Business | Permalink

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You are a senior economist and don't understand the long term trend from skilled labor to automation? Or the capital required in today's business landscape small or large?
Try starting a consumer driven business that requires access to store shelves? or B to B calling on any major corporation that requires extensive ISO documentation along with bidding against better capitalized competitors. Internet driven E-bay style companies are mostly what is happening in small business otherwise the capital requirements far exceeds what most Americans can risk.
I am retired from a career in manufacturing that started in the early 70's and have experienced first hand the country's changing business and labor market.

Posted by: Ron Caldwell | August 19, 2011 at 11:09 AM

I would like to comment on this previous post. I think one must consider all of the so called independent contractors working as freelancers that are paid by the job not by the hour this situation is ripe for abuse. This could be destorting the jobs picture.

Posted by: dennis the menace | September 06, 2011 at 02:55 PM

I think you have hit the nail on the head here. Newer small establishments are able to stay more focused on a particular sector and make decisions quicker without all the redtape of a larger organization.

Posted by: Recruitment Agencies Auckland | December 20, 2011 at 03:05 PM

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June 27, 2011

Stimulating small business activity: Still a struggle

In testimony before Congress on June 22, U.S. Treasury Secretary Timothy Geithner laid out the disproportionate effect the financial crisis has had on small businesses and particularly their ability to raise funds:

"The banking and credit component of the economic crisis was especially damaging for small businesses, which are more dependent on bank loans for financing than are larger firms. Alternative forms of financing, through household credit via mortgages and credit cards, were also deeply compromised by the financial crisis. Mortgages and other loans account for four times the share of liabilities for non-corporate businesses as they do for corporate businesses. Total lending to non-financial businesses shrank for nine straight quarters starting in the fourth quarter of 2008, before turning slightly positive in the first quarter of 2011; on net, lending has declined by a cumulative $4.2 trillion since Fall 2008. Over the same period, larger businesses were able to raise $3.6 trillion by issuing debt securities."

Evidence from the Atlanta Fed's latest small business finance poll of approximately 182 firms in the Southeast confirms that many firms are still struggling with financing. Total financing received among repeat poll participants edged up only slightly in the first quarter of 2011 from the previous quarter. Further, 43 percent of participants overall reported that tighter lending practices are hindering access to credit. In addition, when offers of credit do occur, they often do not materialize into loans as a result of the unfavorable credit terms being offered. In fact, 41 percent of applications to community and regional banks and 57 percent of applications to large national banks were refused by the borrower, according to the first quarter poll.

In response to these ongoing problems, the Administration has created several programs to help small business obtain funding. One is the Small Business Lending Fund (SBLF). Created by the Small Business Jobs Act in September 2010, the fund began accepting applications in December 2010. The SBLF was set up to provide an incentive for financial institutions with less than $10 billion in assets (mostly community banks) to boost lending to small businesses.

Under the terms of the program, the more small business lending increases, the greater the benefit to the institution. In theory, shoring up the balance sheets of the banks in exchange for an increase in small business lending would result in an increase the amount of loanable capital. Further, there would be a greater opportunity cost for failing to bring loans to closure, and this cost could result in borrowers receiving more appealing credit terms. As a result, those small businesses currently rejecting loans based on the cost of funds could see credit terms ease, resulting in more acceptances and an expansion of small business loans. (You can read more about the details of the SBLF here.)

Unfortunately, the program, which closed out June 22, was not very popular. As of the morning of June 22, the Treasury had received 869 applications out of 7,700 eligible lenders. All together, they requested only $11.6 billion out of a possible $30 billion from the program.

Why was participation so low? One potential reason is lack of demand. According to Paul Merski, chief economist and executive vice president of the Independent Community Bankers of America, "You're not going to pull down capital unless you have loan demand."

If demand for small business loans is not expected to pick up, then what is restraining demand?

One possibility that we considered in a macroblog about a year ago is that demand is being restrained as a result of the perception of tight credit supply. Creditworthy borrowers could be assuming they will be denied so they are not applying. Another possibility is that demand is constrained because of economic weakness. To get a handle on the extent to which these factors are restraining demand, we turn back to our small business finance poll. In the poll, we ask those who did not seek credit in the previous three months why they didn't seek it. The chart below shows the responses to the question. (Note that survey participants can check more than one option.)


At first glimpse none of the reasons seem to dominate. However, if we categorize the responses into "I didn't need credit" and "I didn't think I'd able to get credit," the graph becomes a little more useful.

The graph below shows the responses placed into these two categories (where possible). Firms that only marked "sales/revenue did not warrant it," "sufficient cash on hand," or "existing financing meets needs" are put into the "I didn't need credit" category. Meanwhile, firms that only said "unfavorable credit terms" or "did not think lenders would approve" fall under "I didn't think I'd be able to get credit."


We do not claim that our survey is a statistically representative sample, and we of course can only reach existing businesses. The survey is silent on potential new businesses that were not formed because of credit issues that the SBLF could potentially address. With those caveats, we do find that the majority of firms (66 percent) did not borrow because they didn't need to or want to. Whatever the merits of the SBLF program, it appears that understanding why those businesses that are fully capable of expanding are not doing so is at least as important as understanding the slow pace of SBLF activity.

Ellyn TerryBy Ellyn Terry, an analyst in the Atlanta Fed's research department

June 27, 2011 in Small Business | Permalink

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Banks and businesses large and small are stuffed to the gills with cash. Two things that could induce them to spend it are: rising inflation and rising interest rates. Two things the central bank fights hardest to do: hold down inflation and flatten rates to zero as far into the future as possible.

Posted by: Carl Lumma | June 28, 2011 at 11:27 PM

It is the community banks in this country that better serve small businesses. They are important customers at our small banks.
The SBLF will probably only disburse about $2 to $3 billion of those funds because of dividend restrictions imposed on many community banks by the federal reserve as a result of the economic crisis.
SBLF could make a difference because it hits home. Rigth were small businesses need it, at their local community bank.
If you have a business with revenues less than $1mm per year you are not an important customer at the larger banks and they will not assist during this recession.

Posted by: carlos safie | June 29, 2011 at 07:17 AM

Rising inflation can only induce someone to spend money IF they were predetermined to "want" the item, or investment, prior to the bout of inflation. If I "wanted" to buy a new car that costs $20,000 but did not "need" the new car, please explain why the car suddenly costing $25,000 would prompt me to rush out and spend my capital on it? I would assert that it wouldn't. Rising inflation on investment opportunities in fact makes the investment opportunity less compelling not more.

The same holds true for rising interest rates. Rising interest rates only prompts would be borrowers to rush out and secure debt financing if they "wanted" it before the interest rate increases. If they didn't "need" debt financing before, they sure don't perceive themselves as needing debt financing when it is more expensive.

Business small and large have become increasingly risk averse. Debt financing for ANYTHING makes a business riskier not less. I would also assert that debt financing for existing operations adds very little (if any) value to the business. Debt financing for new capital projects CAN add value to the business BUT it also increases risk to the business. Thus, in a world of more risk aversion there is naturally less demand for loans a.k.a. leverage.

The underlying secret that is spreading among businesses is that the "just add leverage" American way is not a sound business strategy. Many businesses of all sizes have caught on to this fact. They seem to only be considering taking out debt financing if they "need" it.

In my opinion a tremendous factor in the increase in risk aversion is the outrageous cost of failure that has only been increasing over the past 30 years. Ironically this is largely because of inflation. Most start-up businesses cannot afford healthcare for their owners or employees. Start-ups initially struggle to provide enough cash (let alone income) to provide for food, transportation, technology, etc. This is only worse when the entreprenuer has a family...as he or she is obligated to provide for other people. So, not only will the start-up struggle to provide for their family...in the event it goes under they will be facing tremendous losses, increased costs through bankruptcy issues, AND they will STILL be obligated to provide for their family (with less resources).

Even a less extreme case...lets just say I wanted to go back to graduate school to secure a better job in a different field or start my own business after school. I will have to take out a student loan that cannot be dissolved EVER and is typically required to be paid back in 10 years (as I understand it). That is potentially over $100,000 in debt that, in the event things don't pan out well, will be a plague for the rest of my life. Repeat the same process of not being able to provide the basic necessities of life such as food, clothing, healthcare, shelter, etc. to my own family and hopefully you will get my point.

You want to increase small business activity? Stop trying to engineer inflation...and reduce the cost of failure to those with a good idea and the drive contribute to society by creating their own business! At least that is my idea for the moment.

Thanks for your time and have a happy 4th of July.

Posted by: Danny | June 30, 2011 at 05:02 PM

We are finding that it difficult to force businesses to borrow money. The main reason a small business wants to borrow is if they see demand expanding for their goods or services. If small business owners don't see demand rising for their products, they will NOT want to take on MORE risk by borrowing. Low interest rates, gov't programs, tax credits, lower taxes, and a plethora of other programs will NOT make a difference. It will not encourage small businesses to borrow.

The problem may be very complex, but the widening income gap in the U.S. has to be part of this issue. If the average consumer has a smaller share of the economy, then it stands to reason that their consumption percentage of the economy will be lower.

The trickle down theory that Republicans seem to be wedded to, will only result in the U.S. economy trickle down the list of vibrant economies.

The great economic expansion that we have enjoyed from the 50s through the 90s was directly attributed to the rise of the middle class and their increasing share of the U.S. economy. If politicians want to reinvigorate the economy, perhaps they should consider how our national income and taxes are distributed throughout our society.

Posted by: mattinmanhattan | July 02, 2011 at 09:46 AM

It is not that I disagree with the idea that "demand" comes before investment or at the very least concurrently, but in fact it is the disingenuous efforts of politicians to use the notion that demand comes first to waste hundreds of billions of dollars on unproductive crap that is in reality designed to do little more than help them win election. At the core, state capitalism works the same way the private enterprise system works if either are to succeed: over the long run both have to make investments that are at best profitable or at worst economically feasible. In the U.S. we happen to be cursed with politicians who do not have the personal responsibility or accountability or historical track record (in the past 20 years) of making such decisions. Thus, many people find the notion of the free market system far superior to that of state run enterprise.

On the wealth gap. I have started to ponder a new notion of the origin of the existence of a wealth gap which has been expanding in the past 20 years. Presently I believe that the disparity between the middle class and the upper class stems from poorly constructed rules, regulations, and incentives. In a world in which the government can craft "perfect" rules/regulation the chances of wealth creation are reasonably fair between the economic classes. Yes there are probably disparities that still exist, but from 1950-1990 there are countless examples of rags to riches or probably even more plentiful rags to a great middle income lifestyle. In the world with perfect regulation income becomes more of a function of true work ethic.

However, in a world of less than perfect regulation...there is an arbitrage that takes place between the better mentally equipped, and financially backed people, and the middle income or poorer classes of people. Quite simply the vast majority of the brain power (which is a minority of people) invests the majority of time determining how they can make the most money in a relatively easy fashion. Why do you think there are SO many terrible lawyers in the world?

Having imperfect rules to the game isn't the only ingredient to an expanding wealth gap. A general decline in morality has to occur as well. It is not enough to have the opportunity to screw other people for money but rather you have to have the desire to do it as well. It doesn't have to be necessarily malicious. It can simply be as easy as a doctor who charges different rates depending on what insurance provider you use. While I am sure there are rules against such a thing, try to keep a straight face and say it doesn't happen on a WIDE scale. Bet you can't do it.

What we need in my estimation is to stop trying to craft the perfect regulation. Begin re-incorporating ethics/morality/human interests into the classroom and probably most importantly the business, legal, medical and any other professional classroom. Sure there have been significant increases in ethics topics in classrooms but I would assert those too are primarily focused on the letter of the law and not the spirit of it...which I would argue is "don't try to screw other people for a living".

Imagine a world where businesses, individuals, and politicians made decisions for their own self interests BUT made a conscience effort to align their self interests with that of society as a whole?

Don't make it so easy on the rich to keep getting richer. They are smarter than you or I. Make it easier for the middle income or poor people with a good idea to experience manufacturing and monetizing that good idea. Just some additional pennies of my thoughts.

Danny

Posted by: danny | July 06, 2011 at 09:57 PM

The great economic expansion that we have enjoyed from the 50s through the 90s was directly attributed to the rise of the middle class and their increasing share of the U.S. economy.

Posted by: small business web design | October 11, 2011 at 01:12 AM

I especially like the comment where you stated "If demand for small business loans is not expected to pick up, then what is restraining demand?". Very good point indeed.


Jeffrey Lynne
www.lynnesenterprises.com

Posted by: Jeffrey Lynne | January 29, 2012 at 05:39 PM

Middle classes have to struggle a lot to keep pace with the today's advancement. There are a lot of job opportunities created for them due to economic development. But it isn't a stable situation.

Posted by: engineering resume | July 07, 2012 at 11:01 AM

I don't know if they have any more tricks up their sleeves to defrost the credit markets. I don't know a lot of small businesses successfully getting small business loans.

Posted by: John Walters | July 13, 2012 at 11:10 PM

After the huge recession a number of small business including large business ventures are lost its shines due to lack of funding and outputs, as small business are totally depend upon bank loans for their funding therefore they are severely effects during the period of recession.

So in response to save the small business banks are really played an essential role in the developing process.

Posted by: Tim Swager | October 26, 2012 at 08:26 AM

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March 30, 2011

A disturbing trend: No growth in total business establishments in U.S.

The last Atlanta Fed poll of small businesses in the Southeast suggested an uptick in confidence late last year. A similar upturn has been noted in the National Federation of Independent Business's survey of its members conducted in February of this year and released in March. This upturn is good news for the U.S. economic outlook, as small firms are one group that has lagged the economic recovery.

It's also good news, given the continuation of unimpressive readings from last week's release of the Quarterly Census of Employment and Wages (QCEW) for the second quarter of 2010. As we have noted previously and highlighted in this recent Wall Street Journal blog post,

"The recession caused a sharp decline in new business start-ups, intensifying job market losses and potentially putting future economic growth at risk."

The QCEW data also showed that the number of business establishments with payrolls in the United States has remained stuck at around 9 million since late 2007. By comparison, in the early 1990s there were about 6.5 million establishments, a number that rose to close to 8 million in 2000 before peaking at 9 million 2007.


The net creation of business establishments—that is, physical locations for conducting business such as manufacturing plants, retail stores and business offices—has in the past been a key ingredient in job growth in the United States. This growth is driven partly by demand from newly created businesses and by mature firms expanding their footprint by opening additional locations. The demand for physical space is also clearly important to the commercial real estate industry, which has been burdened by elevated vacancy rates in many markets and generally low demand for new space.

Another trend from the QCEW data is striking—the number of employees per establishment is much lower than it used to be. The average size of U.S. establishments was relatively stable during the 1990s, at around 16.5 employees per physical location. The 2001 recession was associated with a decline in the average size to about 16 workers per establishment, and the average size continued to track lower during the last decade, moving down to about 15 employees per establishment in 2007. The latest reading for the second quarter of 2010 was 14.3 workers per establishment, up from 14 workers in the first quarter.

Several possible explanations exist for these declines in average establishment size. First, there is a cyclical response to weak demand as firms cut their payrolls. Second, productivity gains over time allow a plant, store, or office to support the demand for its goods or services with fewer workers. Third, there is a secular trend away from industries that have a large average establishment size, such as manufacturing.

If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services, and those services are primarily embodied in the staff at doctors' offices and hospitals. Manufacturing, on the other hand, has witnessed dramatic declines in average plant size. During the 1990s, average plant size was relatively stable at around 43 workers. The average size then declined to about 38 workers following the 2001 recession and remained around that level through 2007 before declining again and reaching an average size of 33 workers per plant in the second quarter of 2010. This trend appears to primarily reflect a combination of secular shifts away from labor-intensive types of manufacturing where productivity gains have already played out—some apparel manufacturers, for instance—and sharp cyclical downturns.

Of course, something will have to give if there is employment growth—primarily more and/or larger establishments. Consider the following thought experiment: if the average size of establishments returns to the prerecession level of 15 workers per location, and private-sector jobs are added around a pace of 2.4 million a year pace (or 200,000 jobs a month), then we would see establishment growth return to the 1992–2007 average of about 160,000 per year. Clearly, we are currently far below that trend.


Photo of John Robertson By John Robertson
Vice president and senior economist in the Atlanta Fed's research department



March 30, 2011 in Employment, Real Estate, Small Business | Permalink

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I'm not sure we'll ever go back to what we were before. Our productivity has to be exploding, so fast now that it can't be captured for some time. When MS windows came out, it took many years to transform how we do business. But, transform it did. well, that same process is happening again but this time the number of years to transformation should be much shorter.

Posted by: FormerSSresident | April 01, 2011 at 12:54 AM

Hi John,

You can really can see the significance of the decline due to recession. At least it has bottomed out.

Posted by: Intrinsic Value | April 01, 2011 at 06:25 AM

"If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services"

Or, actually, the much more likely (and obvious - if not politically permissible) result of the vast, superficial "subsidizing" of health care - one that has resulted in a grotesque misallocation of capital, the warping of the macroeconomy, and a decades-long medical uber-inflation which (along with academic tuition inflation) is treated by government insiders as though it is some sort of inexplicable "mystery".

As opposed the political payola and bribery it so clearly is.

Posted by: csa721 | April 03, 2011 at 11:58 AM

Looking at that chart of business establishments makes me wonder even more about the point of the Birth Death model. If it's supposed to take into account the birth and death of new businesses, then why did it ever add all those jobs on a monthly basis. The data is clear that new business formation simply hasn't been happening for years.

Posted by: apj | April 05, 2011 at 05:43 AM

The culture of fear and uncertainty, higher energy costs and open political/media hostility towards business doesn't help.

If you are a venture capitalist, angel investor or entrepreneur is this likely to cause you to think startup?

Why should you?

Posted by: Army of Davids | April 23, 2011 at 02:54 PM

I find it funny how these results contradict each other, companies are just finding new ways to cut costs, and that normally means cutting employees

Posted by: Best virtual office | November 02, 2011 at 01:50 AM

I'm with Best, these types of results are always contradictory. Businesses are boosting profits by cutting employees. That is not sustainable.

Posted by: Penny Stocks | November 03, 2011 at 06:02 PM

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March 18, 2011

Survey: Small business optimism improving, especially among young firms

Through our quarterly Small Business Lending Survey, we heard from our small business contacts that economic or sales uncertainty acts as a considerable influence in their hiring and capital expenditure decisions. In the third quarter, half of business contacts not planning to increase capital expenditures indicated economic or financial uncertainty was affecting their decisions. Likewise in the fourth quarter, economic or financial uncertainty was noted among those planning to hire as an influential factor. (Below are charts of our survey's special questions on this topic.)


Since uncertainty can act to inhibit investment and hiring, a reduction of uncertainty and a more positive outlook for the economy might be early signs of future growth for small firms. Recent data suggest both optimism and demand for credit from small firms are on the rise. The net percent of banks reporting stronger demand from small firms has been steadily improving since the first quarter of 2009 and was positive (that is, more banks reported increased demand versus decreased demand) for the first time since the second quarter of 2006, according to the January Senior Loan Officer Survey. Also, of the banks that eased standards, many reported a more favorable or less uncertain economic outlook. In another report, Capital One Bank's fourth quarter Small Business Barometer survey, suggested that "many U.S. small businesses are more optimistic about the strength of the economy and their own financial position relative to the third quarter." The National Federation of Independent Business' (NFIB) Index of Small Business Optimism has also been steadily rising since March 2009. Last week, the NFIB released results from its most recent survey:

"The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into "second gear" for economic growth…

" 'This is not a reading that characterizes a strongly rebounding economy,' said NFIB chief economist Bill Dunkelberg. 'But it is the third best reading since the fourth quarter of 2009 when the economy was expanding rapidly. So, it gives us cause for some real optimism. Apparently the future is looking brighter for a few more small-business owners, although much will depend on what Congress does this year.' "

As the NFIB notes, much in line with gross domestic product growth, optimism at small firms has been improving, albeit at a slow pace. Here at the Atlanta Fed, we have seen the same gradual improvement in optimism in our Small Business Lending Survey.

While we don't create an overall optimism index, we ask firms how they expect the number of employees in their firm to change over the next six to 12 months—increase, no change, or decrease. Similarly, we ask them about their expected changes to capital expenditures and level of sales. From the third to the fourth quarter of last year, the outlook in all three categories improved among the 163 participants that took both the Q3 and Q4 surveys. The percent of those anticipating increases (net of those anticipating decreases) are plotted on the chart below. Any dot appearing to the left of the 45-degree line indicates a greater net percent indicated "increase" in the fourth quarter. A few other survey questions are also plotted on the graph and explained in detail underneath.

031811c
(enlarge)

One of the more interesting findings in our survey was that young firms (which we define as any firm less than seven years old) in the Q4 survey were found to be far more optimistic about future business conditions than their mature (seven years or older) counterparts. Young firms were more likely to indicate they were seeking credit to expand their business. Also, significantly larger net percents of young firms anticipate increases to employees, sales, and capital expenditures over the next six to 12 months. In fact, none of the young firms indicated they anticipated decreases to the number of employees in their firm over the next six to 12 months. The differences are outlined in the table below.

031811d

The optimism among this group of young firms was present despite the group having a relatively difficult time obtaining credit. (The difference in the average amount of financing received between mature and young firms was statistically significant at the 98 percent level.) When comparing applications for credit, 42 percent of young firms seeking credit received the full amount or most of the amount requested compared to 64 percent of mature firms. The lack of credit fulfillment by young firms was not the result of not trying, as a greater portion of young firms applied for credit—on average, young firms applied through a larger variety of credit channels.

As research by John Haltiwanger, Ron Jarmin, and Javier Miranda has demonstrated, credit availability for young firms and their outlook for the future is particularly important since young firms play a large role in net job creation. (This topic was discussed in a past macroblog as well.)

While the movements are small and gradual, it's nice to see that things appear to be improving and that we're seeing the trend across many measures.


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


March 18, 2011 in Economic Growth and Development, Employment, Labor Markets, Small Business | Permalink

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A few things:

First, there's an obvious correlation between firm age and firm size. Is the real relationship between the age of firms, or the size of firms? The former suggests some difference in outlook; the later, some difference in the constraints faced by firms given their scale.

Secondly, the disaggregation in your small business survey makes it difficult to interpret the chart. As far as I can tell, the metrics are presented separately for employers that are planning to hire and employers that are planning not to spend more on capital expenses. What percent of all employers do these two groups comprise? Are these employer sets overlapping, or distinct? And, why not just present a single chart of "which factors affect your decisions on hiring?" and "Which factors affect your decisions regarding capital expenses?"

Not to try to tell you how to present your data...I'm just seeing if I've missed something.

Thanks,
fischer

Posted by: fischer | March 23, 2011 at 08:16 PM

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November 09, 2010

Entrepreneurs of necessity

On October 26–27, the Atlanta Fed's Community and Economic Development team, in partnership with the Bank's Center for Human Capital Studies, the Ewing Marion Kauffman Foundation, and the Federal Reserve Bank of Dallas, sponsored a conference titled "Small Business, Entrepreneurship, and Economic Recovery: A Focus on Job Creation and Economic Stabilization." The conference covered a large range of topics including employment, financing, and public policy issues, and material summarizing the findings from the conference and related information will be published in the coming weeks. (You can find the conference papers here.)

One of the things that struck me during the conference is the challenge of simply defining and measuring entrepreneurial activity. For instance, a paper presented by Leora Klapper from the World Bank described recent World Bank efforts to systematically collect country-level data on business formation using data on the number of new domestic corporations—private companies with limited liability each year.

Klapper presented a cross-country chart of this measure, by which countries are grouped into relative income buckets, with the United States being in the "high income" bucket. What chart 1 shows is that entrepreneurial activity declined in all categories of countries in 2009. For high-income countries (including the United States), entrepreneurial activity came to a standstill in 2008 and declined 10 percent in 2009.

This evidence is consistent with measures of job creation from opening employer firms (firms with a payroll) in the United States, such as those contained in the Business Employment Dynamics data. These data are from government administrative unemployment insurance records. On the first day of the conference, John Haltiwanger from the University of Maryland gave a fascinating presentation using the data on firms with a payroll and longitudinally linked versions of these data (the Business Dynamics Statistics) to illustrate a decline in job creation in recent years at businesses that have payrolls and, importantly, a decline in job creation at opening employer firms.

However, another paper at the conference by Robert Fairlie from UC-Santa Cruz showed a measure of entrepreneurial activity that has been on a rapid increase in recent years. Chart 2 shows a picture of Fairlie's measure, which is also published by the Kauffman Foundation as the Index of Entrepreneurial Activity.

This measure is based on the Current Population Statistics survey, which among other things asks respondents the question "Do you have a business?" Dr. Fairlie matches this response with the response in the previous month to identify the number of new businesses created (subject to meeting criteria, such as devoting at least 15 hours per week to this business, and restrictions, such as the exclusion of adults over age 65). Importantly, Fairlie's measure of new businesses picks up new nonemployer businesses, many of which are not incorporated.

What is particularly interesting about Fairlie's research is that he shows not only that this measure of entrepreneurial activity has surged, but that it is closely related to movements in local unemployment rates. That is, he has potentially uncovered an "entrepreneur of necessity" effect caused by high unemployment. For many unemployed workers, the benefits of starting a business during a weak economic environment outweigh the costs. It is noteworthy that the largest proportionate increase in this measure of entrepreneurial activity is by people with less than a high school diploma. This group has been especially hard hit by the recession and weak recovery, and it appears that many have responded by starting their own business.

If entrepreneurial activity is a source of economic growth generally, then a surge in entrepreneurial activity is good news for the economic outlook, right? Indeed, Fairlie cites a 2009 Kauffman Foundation study by Dane Stangler that finds over half of the current Fortune 500 firms started during recessions or bear markets. Also, a 2010 Kauffman study by Michael Horrell and Robert Litan find that, on average, start-ups are not affected in the long term if they start in a recession. However, Horrell and Litan also find negative impacts when the recession is prolonged. To the extent that historical patterns are repeated, one implication of the latter finding is that cohorts starting businesses right before or at the start of the 2007–09 recession may have worse outcomes relative to firms starting more recently.

More generally, this study raises questions about the current economic recovery. For example, if the number of new firms with payrolls is down but the number of nonemployer businesses is up, then what could be expected to happen over time? At what rate do new businesses with no employees become employers, and how fast do they tend to grow? This question is especially important because a new business with no employees generates fewer jobs than a new business with employees unless the nonemployer is purchasing labor services through some other means. As noted here, some researchers are skeptical of the economic importance of growth in nonemployer businesses without controlling for possibly important factors such as the industry they are in or their revenues. According to the U.S. Census Bureau, most nonemployers are self-employed individuals operating very small unincorporated businesses. It also seems reasonable to think that many of them are independent contractors providing labor services to other firms. Clearly, there is no shortage of need for more research on these topics.

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

 

November 9, 2010 in Business Cycles, Employment, Small Business | Permalink

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I am not an "Entrepreneur of Necessity" but an Entrepreneur of Opportunity. I recently started my own Consulting LLC company. Having worked 17 years as an Architect and for a national home builder. I refuse to stay home and collect an Unemployment Check from my layoff of over a year.

I created my own consulting service that can: work for less fee than my competition (I have little overhead), I have a quicker turn around than my competition (working long nights and weekends). Because of my education and experience I provide bundled/specialized services that would require several companies instead of just me. I don't want to rub it in the national homebuilder's face, but it's their loss and my family's gain.

Don't get me wrong, I have never hustled more in my entire life. I am opportunistic and entrepreneurial. I find that people are interested in working with me because as the saying goes "If you want to get something done, ask a busy person to do it".

I do wish there was help with reducing the taxes, cost for health care and insurance. These costs make it difficult for me to keep what I am struggling to earn. If the costs were not so onerous, I would hire one or two employees.

Joe from Jersey

Posted by: Joe from Jersey | November 10, 2010 at 11:37 AM

This is what Americans do- they can survive. I'm sure thousands of folks have their own company, and the trend has been sometime in the making. Many people simply do not want to buy into the game, which appears grossly unfair, as an employee.

I have to think a rational case could be made that many people are better off with three acres and some seeds than a vast majority of jobs.

I think some of these business ventures are also driven by a rejection of corporate America and the domination and exploitation that is perceived now by our population. Instead of rising up to a skillbase for IBM or GE, it's better to work part time at some job and do your own thing on the side. And they are likely right to do this in my estimation.

Posted by: FormerSSresident | November 11, 2010 at 09:51 PM

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September 30, 2010

Small businesses are the engine of job growth…or is the story more complicated?

Small businesses typically seek loans to grow their business, hire more workers, or purchase equipment needed to handle more activity. However, business owners have either been unwilling to take on debt or have been unable to find the small business loan opportunities they seek. This message is the one seemingly sent by small business owners who participated in polls such as the NFIB survey and the Atlanta Fed's own surveying efforts highlighted in past macroblog posts (here and here and also on our new Small Business Focus web page).

This week President Obama signed into law a new initiative to try to stimulate borrowing and spending by small businesses. Such policy actions are usually based on the premise that "small businesses are the engine of job growth." However, it is tempting to be skeptical of claims that talk about any large group of individuals or firms as if they are a single, homogeneous unit. Idiosyncratic features such as a firm's industry, location, or age might matter as much as does its size, which would seem to indicate that not all types of small business are equally powerful engines of job growth.

Economic research published last month by John Haltiwanger, Ron Jarmin, and Javier Miranda provides some compelling evidence on the relationship between firm size and job growth. It turns out that the age of a firm is important independent of its size. In particular, the paper finds no systematic relationship between net job growth rates and firm size after controlling for firm age. To quote from the paper's abstract:

"There's been a long, sometimes heated, debate on the role of firm size in employment growth. Despite skepticism in the academic community, the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates. The widespread and repeated claim from this community is that most new jobs are created by small businesses. … However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an 'up or out' dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation."

This finding doesn't imply that firm size is irrelevant, but size matters mainly because, conditional on survival, young firms grow faster than older firms and tend to be small. In other words, because start-ups tend to be small, most of the truth to the popular perception that small businesses create the most jobs is driven by the contribution of start-ups to net job growth.

Because of the vital role that young firms appear to play in job creation, understanding the various factors that influence business start-up decisions is particularly important. To quote the conclusion of the paper:

"In closing, we think our findings help interpret the popular perception of the role of small businesses as job creators in a manner that is consistent with theories that highlight the role of business formation, experimentation, selection and learning as important features of the U.S. economy. Viewed from this perspective, the role of business startups and young firms is part of an ongoing dynamic of U.S. businesses that needs to be accurately tracked and measured on an ongoing basis. Measuring and understanding the activities of startups and young businesses, the frictions they face, their role in innovation and productivity growth, how they fare in economic downturns and credit crunches all are clearly interesting areas of inquiry given our findings of the important contribution of startups and young businesses."

One of the goals of the Atlanta Fed's new small business web page is to feature data, information sources, and research that helps disentangle the complex contributions of small businesses to economic growth and development. This web page will also highlight the findings from specific initiatives sponsored by the Atlanta Fed.

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

September 30, 2010 in Small Business | Permalink

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Also you should document the growth rates of these new winners as they get 'older.'

As with many things in business, there are often lopsided results where a few companies grow tremendously compared to the remainder. Understanding exactly what dynamics are involved in sustaining high growth rates would be worthwhile research.

Posted by: beezer | October 01, 2010 at 11:54 AM

This is a wonderful addition to the factual context of the job-creation problem.

Policies aimed at getting existing businesses to hire may be missing the point; the problem is that entrepreneurs are confused and demoralized and unwilling to take risks in an unstable environment. Someday, I hope to be one of them -- but at the moment I wouldn't go out and start a business unless there were no other way to feed my family.

I have also heard it said that a disproportionate share of small businesses are in the real estate sector, which of course is likely to remain depressed for at least another year.

But I suspect there are, or will soon be, job openings at class action law firms and forensic accounting firms, and that the foreclosure industry is going to have to triple its workforce in order to actually meet bare minimum legal standards in the future!!

Posted by: Wisdom Seeker | October 11, 2010 at 11:50 PM

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May 28, 2010

How "discouraged" are small businesses? Insights from an Atlanta Fed small business lending survey

Roughly half of U.S. workers are employed at firms with fewer than 500 employees, and about 90 percent of U.S. firms have fewer than 20 employees. While estimates vary, small businesses are also credited with creating the lion's share of net new jobs. Small businesses are, in total, a big deal. Thus, it is no surprise that there is congressional debate going on about how to best aid small businesses and promote job growth. Many people have noted the decline in small business lending during the recession, and some have suggested proposals to give incentives to banks to increase their small business portfolios. But is a lack of willingness to lend to small businesses really what's behind the decline in small business lending? Or is it the lack of creditworthy demand resulting from the effects of the recession and housing market distress?

Economists often face such identification dilemmas, situations in which we would like to know whether supply or demand is the driving factor behind changes within a market. Additional data can often help solve the problem. In this case we might want to know about all of the loans applied for by small businesses, whether the loans were granted and at what rates, and specific information on loan quality and collateral. Alas, such data are not available. In fact, the Congressional Oversight Panel in a recent report recommends that the U.S. Treasury and other regulators "establish a rigorous data collection system or survey that examines small business finance" and notes that "the lack of timely and consistent data has significantly hampered efforts to approach and address the crisis."

We at the Federal Reserve Bank of Atlanta have also noted the paucity of data in this area and have begun a series of small business credit surveys. Leveraging the contacts in our Regional Economic Information Network (REIN), we polled 311 small businesses in the states of the Sixth District (Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee) on their credit experiences and future plans. While the survey is not a stratified random sample and so should not be viewed as a statistical representation of small business firms in the Sixth District, we believe the results are informative.

Indeed, the results of our April 2010 survey suggest that demand-side factors may be the driving force behind lower levels of small business credit. To be sure, when asked about the recent obstacles to accessing credit, some firms (34 firms, or 11 percent of our sample) cited banks' unwillingness to lend, but many more firms cited factors that may reflect low credit quality on the part of prospective borrowers. For example, 32 percent of firms cited a decline in sales over the past two years as an obstacle, 19 percent cited a high level of outstanding business or personal debt, 10 percent cited a less than stellar credit score, and 112 firms (32 percent) report no recent obstacles to credit. Perhaps not surprisingly, outside of the troubled construction and real estate industries, close to half the firms polled (46 percent) do not believe there are any obstacles while only 9 percent report unwillingness on the part of banks.

These opinions are reinforced by responses detailing the firms' decisions to seek or not seek credit and the outcomes of submitted credit applications.

052810a
(enlarge)

Of the 191 firms that did not seek credit in the past three months, 131 (69 percent) report that they either had sufficient cash on hand, did not have the sales/revenues to warrant additional debt, or did not need credit. (Note the percentages in the chart above reflect multiple responses by firms.) These responses likely reflect both the impact of the recession on the revenues of small firms as well as precautionary/prudent cash management.

The administration has recently sent draft legislation to Congress for a supply-side program—the Small Business Lending Fund (SBLF)—to address the funding needs of small businesses. The congressional oversight report raises a good question about the potential effectiveness of supply-side programs:

"A small business loan is, at its heart, a contract between two parties: a bank that is willing and able to lend, and a business that is creditworthy and in need of a loan. Due to the recession, relatively few small businesses now fit that description. To the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction."

That said, one way that a supply-side program like SBLF would make sense, even if low demand is the force driving lower lending rates, is if there are high-quality borrowers that are not applying for credit merely because they anticipate that they will be denied. We could term these firms "discouraged borrowers," to co-opt a term from labor markets (i.e., discouraged workers).

If a program increased the perceived probability of approval, either by increasing approval rates via a subsidization of small business lending or merely by changing borrower beliefs, more high-quality, productive loans would be made.

Just how many discouraged borrowers are out there? The chart above illustrates that, indeed, 16 percent of all of our responding firms and 21 percent of construction and real estate firms might fall into this category. I add "might" because the anticipation of a denial may well be accurate but based on a lack of creditworthiness and not the irrational or inefficient behavior of banks. Digging into our results, we find that 35 percent of the firms who did not seek credit because of the anticipation of a denial also cited "not enough sales," indicating that a denial would likely have reflected underlying loan quality.

In the labor market, so-called "discouraged workers" flow back into the labor force when they perceive that the probability of finding an acceptable job has increased enough to make searching for work, and working, attractive again. We should expect so-called "discouraged borrowers" to do the same. That's because if they don't, the likely alternatives for them, at some point, would be to sell the business or go out of business. It seems unlikely that, facing such alternatives, a "discouraged" firm would not attempt to access credit. The responses of firms in our sample are consistent with this logic; 55 percent of those who did not seek credit in the past three months because of the anticipation of a denial indicated that they plan to seek credit in the next six months.

Our results also provide some interesting data on an assumption underlying the policy debate: that those small businesses are credit constrained. Of the 117 firms in the survey that that sought credit during the previous three months, the following chart illustrates the extent to which these firms met their financing needs.

052810b
(enlarge)

Based on firm reports of the credit channel applications submitted in the previous three months, we created a financing index value for each firm. Firms that were denied on all of their credit applications have a financing index equal to 1, while firms that received all of the funding requested have an index level of 5. Index levels between 1 and 5 indicate, from lesser to greater, the extent to which their applications were successful. In the chart we plot data on the financing index levels of all firms in our sample and then split according to whether the firm is in construction and real estate. Among construction and real estate firms, 50 percent of firms had an index below 2.5, suggesting most did not get their financing requests meet. In contrast, the median index value of 4.7 for all other firms suggests that most of these firm were able to obtain all or most of the credit they requested. This difference between real estate–related firms and others is really not surprising given that the housing sector was at the heart of the financial crisis and recession. But it does suggest that more work needs to be done to analyze the industry-specific funding constraints among small businesses.

By Paula Tkac, assistant vice president and senior economist, of the Atlanta Fed

May 28, 2010 in Banking, Saving, Capital, and Investment, Small Business | Permalink

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Hi,

Excellent article; I have plugged it over at my own blog (and at Global Economy Matters). I don't know why the trackback has not shown up yet.

Anyway, it was very interesting get some real hard evidence (even if it is very specific sample) that deleveraging is NOT only driven by supply side constraints; to me this is one of the big untold stories of this financial crisis.

best

Claus

Posted by: claus vistesen | May 31, 2010 at 09:32 AM

We have to admit that cash flow is one of the most common challenges entrepreneurs face. A prudent cash management
strategy has been proven to be vital in preserving a business capital and return.

Posted by: insolvency advice | July 19, 2010 at 12:13 AM

Yes we have to admit about the cash flow is most common challenges entrepreneurs face.

Posted by: paid surveys | August 29, 2010 at 08:36 AM

Since small business drive the economy cash flow is the most important issue that they have. Buying inventory, making payroll and all the other financial obligations can easily put a company out of business without having access to immediate cash.

Posted by: Dan | March 23, 2011 at 11:28 AM

Great blog.

Posted by: John Byner | March 26, 2011 at 08:43 PM

A good option would be a Business Cash Advance. It is based on your average monthly sales, not credit, so bad credit is ok and approval rates are 98%. They are unsecured, there is no personal guarantees, require no collateral, and will fund within a few days of applying. Also there are no restrictions on how you can use the money.

Posted by: Mark Sanchez | November 15, 2011 at 02:47 AM

It is a good thing to create SBLF because it is appropriately for small business who can't afford the lending terms of the banks.

Posted by: crm software | February 10, 2012 at 07:30 AM

I couldn't agree with this post more. Our economy thrives on the hard work of small businesses, particularly online businesses such as international ecommerce trading firms and even sole proprietorships. Right now, international eCommerce is the only thing driving outside capital right into the heart of this country and keeping the economy afloat.

Posted by: small business loans | May 30, 2012 at 03:15 PM

There are reasons why small business start lending money from the banks and investors, one their reason is to fund money to finance expenses to expand their business.

Posted by: Factoring Service | June 27, 2012 at 09:16 AM

Small company business loans are similar with other economical services such as restaurant financing where economical institutions offer the cash to borrower at time of emergency and charge interest rate.

Posted by: kwik quid | July 13, 2012 at 05:41 AM

I can tell you, they are very discouraged. A lot of them aren't even trying for traditional small business loans anymore.

Posted by: John Walters | July 13, 2012 at 11:12 PM

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May 04, 2010

The young and the restless

I have been reading a lot lately about the role of small firms in the economy. Recommended resources in this regard include these Kauffman Foundation papers.

One of the themes emerging from this literature is that focusing just on firm size misses an important aspect of job creation and destruction in the U.S. economy—namely, the interaction between firm size and firm age. To illustrate this, the following chart is a dissection of the U.S. Bureau of Labor Statistics (BLS) quarterly Business Employment Dynamics (BED) data into private employer firms with fewer than 50 employees and those with at least 50 employees (note that the BED classifies businesses using a dynamic size measure in which the job creation/destruction is allocated to a size class dynamically as a business moves through a size class from prior quarter to the current quarter). Within each firm type it is possible to allocate net employment change accounted for by opening firms (firms that had zero employment in the previous quarter), closing firms (firms with zero employment this quarter), and the net job change at surviving firms (employment at firms that expanded over the quarter less employment at firms that downsized over the quarter).

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This chart displays some striking features:

  • The contribution of opening small firms to net job growth is very large (averaging about 1 million jobs a quarter). In fact, when opening firms are netted out of the data, existing firms on average destroy more jobs than they create.
  • Job creation at new firms has been relatively stable over time. During the recessionary period from the end of 2007 through the second quarter of 2009, the decline in jobs created at opening firms was surprisingly small.
  • Job losses at closing firms did not surge in the most recent recession. In fact, job destruction caused by closing firms is relatively stable over time (research suggests that, in addition to the fact that many firms get smaller before they finally close, there is a significant "up or out" phenomenon in that many firms that closed were recently opened firms that failed).
  • Most of the cyclical action is at surviving firms, and larger surviving firms tend to account for most of the variation in net employment change. During the recessionary period from the end of 2007 through the second quarter of 2009, surviving firms with at least 50 employees lost about twice as many jobs as firms with fewer than 50 employees (see for example, the study by Moscarrini and Postel-Vinay on the relative cyclical sensitivity of large and small firms).

Of course, this is largely an accounting exercise. The challenge is trying to understand the causes for these features, and how they may change over time. It seems that there is much we don't know about the underlying factors. For instance, this paper by Dane Stangler and Paul Kedrosky investigates in considerable detail the possible explanations for why the number of new firms is so stable over time. In the end, the phenomenon remains largely a puzzle, and there are many subplots. For instance, the correlation between venture capital spending and overall firm creation is negligible but very important in high-tech industries. Also, the dramatic increase over time in the number of entrepreneurship courses offered at colleges and universities had no appreciable impact on the number of new firms in the United States (although it may have prevented a decline).

Perhaps the focus on the number of new firms is misguided. What really matters might be who these new firms are—not how many there are. Research by Dane Stangler suggests that, at any point in time, a relative handful of high-performing companies account for a large share of job creation and innovation. This conclusion suggests that a key to long-term economic growth may lie in ensuring that the economic environment is conducive to the ongoing creation of these types of high-growth performers.

By John Robertson, vice president in the Atlanta Fed's research department

May 4, 2010 in Economic Growth and Development, Employment, Small Business | Permalink

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Comments

My fear is that the fiscal policies of the current administration will be detrimental to small business. Taxes on small business are headed up.

Will be interesting to see what that does to expansion and hiring.

Posted by: Jeff | May 04, 2010 at 09:26 PM

Yep- you know the larger firms can't/don't/won't innovate. The market discovery risk is shifted to external companies where the larger firm then tries to select the best of breed. Seems like those not selected wither away eventually..

However after our recent financial earthquake, I wonder if there will be some change here. That model is itself possibly getting mature.

Posted by: FormerSSResident | May 05, 2010 at 09:06 AM

Your last point is the most important: "economic environment is conducive to the ongoing creation of these types of high-growth performers." I agree that the focus of attention should be not just (or even necessarily) on firm creation, but on firm growth. If the number of firms is relatively stable, then it is the growth of firms - from small to medium and from medium to large -- that matters to overall job creation.

Posted by: Ken Jarboe | May 06, 2010 at 11:56 AM

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