C-Suite Wednesday – Businesses Without Employees Face More Difficulties with Obtaining Financing

July 26, 2023

Delaney Sexton
Contributing Editor

C-Suite Wednesday – Businesses Without Employees Face More Difficulties with Obtaining Financing

In the United States, there are 27 million businesses with no paid employees besides the owner, known as nonemployer firms. This comprises 80% of small businesses. Of these nonemployer businesses, 38% are start-ups that have been in business for 0 to 2 years. Businesses without employees experience unique financing challenges throughout the life of the business, and being aware of the data can help lenders better support these businesses and their financing needs.

These are the statistics from the Federal Reserve Banks:

  • Start-up nonemployer firms do not have any outstanding debt 58% of the time compared to 29% of employer firms.
  • 40% of older nonemployer businesses do not have outstanding debt while 28% of older businesses with employees do not have debt.
  • If the nonemployer firms do have debt, it is most likely to be $25,000 or less.
  • Whenever small businesses without employees use financial service providers, they are most likely to turn to large banks. The most popular sources after large banks are small banks and credit unions.
  • Younger nonemployer businesses most frequently use their own personal savings for funding. They then turn to friends or family and then a financial institution or lender as their next funding source.
  • Older employer businesses still utilize their personal savings most often, but unlike younger nonemployers, they turn to government funding sources next for financing.
  • In the last year, only 28% of nonemployer firms applied for loans, lines of credit, and merchant cash advances.
  • Nonemployer firms applied for business loans slightly more often than employer firms (37% and 34% respectively).
  • Small businesses with employees and without employees applied for SBA loans at the same rate, 23%.
  • When applying for loans, lines of credit, or merchant cash advances, small businesses with no employees are more likely to be denied than businesses with employees.
  • Although businesses with employees are denied at a higher rate than those with employees, an older nonemployer business is more likely to be fully approved than denied.
  • The top financing sources that fully approve nonemployer businesses are small banks (37%), credit unions (36%), and large banks (29%).

Small Business Credit Survey, Federal Reserve Banks