Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances

By Bitler, Marianne P.; Robb, Alicia M. et al. | Federal Reserve Bulletin, April 2001 | Go to article overview

Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances


Bitler, Marianne P., Robb, Alicia M., Wolken, John D., Federal Reserve Bulletin


Small businesses--firms having fewer than 500 employees--are an integral part of the U.S. economy. They account for about half of private-sector output, employ more than half of private-sector workers, and provide about three-fourths of net new jobs each year.(1)

Newly available data from the Survey of Small Business Finances provide a detailed look at these firms--their characteristics and their use of credit and other financial services. The survey is the most comprehensive source of such information; no other source provides the breadth and detail of information for a nationally representative sample of small businesses.

Since the first small business survey in 1987, the financial landscape in which these firms operate has changed markedly. Restrictions on interstate branching and banking have been relaxed, and certain financial institutions are now permitted to offer a wider range of financial services. Technological innovations (such as the use of small-business credit-scoring models) and structural changes in the financial services industry (such as consolidation of banking and thrift institutions) have also contributed to the alteration. By comparing the newest survey data with results from earlier surveys in 1987 and 1993, policymakers and researchers will be able to assess the effects these marketwide changes may have had on the use of financial services by small businesses and on the competitive financial environment in which they operate.(2)

The latest survey gathered data for fiscal year 1998 from 3,561 firms selected to be representative of small businesses operating in the United States in December 1998.(3) The data show that in 1998, as in 1987 and 1993, most small businesses were very small (nearly two-thirds had fewer than five employees) and most (nearly four-fifths) were located in urban areas.(4) Ownership characteristics had changed somewhat since 1993--nearly 15 percent were owned by minorities (up from nearly 12 percent in 1993), and more than 24 percent were owned by women (up from nearly 21 percent in 1993).

Commercial banks continued to be the supplier most commonly used by small businesses for financial services other than leasing, brokerage services, and trust and pension services. Finance companies and leasing companies were also important suppliers of credit and financial management services, especially for the largest firms. The likelihood of using a service increased with firm size, as did the likelihood of using each type of supplier except thrifts and family and individuals.

In the 1998 survey, 55 percent of small businesses reported outstanding loans, capital leases, or lines of credit at year-end, compared with 59 percent in the 1993 survey. Credit use increased strongly with firm size: About 33 percent of the smallest firms had outstanding loans, capital leases, or lines of credit, compared with about 92 percent of the largest firms. Although the percentage of small businesses with outstanding loans, capital leases, or lines of credit was about the same in 1998 as in 1993, the types of credit used changed somewhat over the intervening period: The percentage that had outstanding vehicle loans, equipment loans, trade credit, and other loans declined somewhat, whereas the percentage that had outstanding mortgages or used personal and business credit cards for business purposes increased.

The 1998 data are still being edited and are therefore subject to revision. However, the descriptive findings reported here are likely to be robust.(5) Once the data are final, the database will allow for rigorous analysis that takes into account characteristics of the businesses, their owners, and existing markets. Researchers will be able to study many aspects of small business finance, including, for example, how the proximity of financial institutions affects the mix of financial products the firm uses, which firm and owner characteristics affect the ability of small businesses to obtain credit, and how lending patterns vary with these characteristics. …

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