Financial Services Used by Small Businesses: Evidence from the 2003 Survey of Small Business Finances

Abstract

Small businesses-nonfarm entities with fewer than 500 employees-are an integral part of the U.S. economy.They account for about half of privatesector output, employ more than half of private-sector workers, and have generated 60 percent to 80 percent of net new jobs annually over the past decade.1 Given the significant role of small businesses in the national economy, understanding trends in the types and sources of financing they use is important for economic research and policymaking, especially because small businesses typically finance their operations quite differently than large corporations do.For example, a small business often relies on the personal resources and credit history of the firm's owners to access credit.Newly available data from the Federal Reserve Board's 2003 Survey of Small Business Finances (SSBF) provide detailed information on the use of credit and other financial services by these firms.The SSBF is the most comprehensive source of information available on the characteristics of small businesses and their owners; no other survey provides the breadth and detail of information for a nationally representative sample of such firms.Moreover, policymakers and researchers can compare the newest SSBF data with results from the previous surveys, which cover 1987, 1993, and 1998.Most of the changes reported in this article are for the period between the 1998 and 2003 surveys. 2 The latest survey gathered data from 4,240 firms selected to be representative of small businesses operating in the United States at the end of 2003. 3 As in previous surveys, the data show that most businesses were very small and were located in urban areas.Also as in previous surveys, the percentage of firms involved in the provision of business and professional services increased somewhat, whereas the percentages of firms engaged in manufacturing and in retail and wholesale trade declined.Among firms that were corporations, those organized under subchapter S of the U.S. Internal Revenue Code (S corporations) continued to grow as a proportion of all small businesses relative to those organized under subchapter C (C corporations). 4