For small business lenders, understanding today’s rapidly shifting financial landscape is crucial for building strong client relationships and identifying growth opportunities. This year’s Federal Reserve Report on Employer Firms provides compelling insights into how small businesses are adapting their financing strategies and managing operational challenges in this dynamic environment.
The data reveals clear patterns in lending demand, debt management, and operational challenges—patterns that savvy small business lenders can leverage to provide tailored financial solutions to clients in their market.
Financing demand: A market divided
The data highlights a divide in financing demand among small businesses. A majority 59% of firms actively pursued financing in the past year, primarily driven by operational needs, while 46% sought funds for expansion plans.
Conversely, 41% of businesses opted not to seek financing, with 63% of those opting not to seek capital citing sufficient funding as their primary reason. This market split suggests a mature segment of well-capitalized businesses operating alongside growth-oriented firms requiring strategic financial support.
The evolving debt landscape
A notable shift has occurred in business debt levels since 2019. The percentage of firms carrying more than $100,000 in debt has increased significantly from 31% to 39%. Combined with the fact that 34% of firms report challenges with debt payments, this trend may indicate that small businesses are experiencing increased stress alongside higher debt levels.
Higher interest rates have also created substantial ripple effects:
- 54% of businesses face increased debt costs
- 37% have delayed expansion initiatives
- 31% report decreased customer demand
Lending approval patterns
The current lending environment shows variations in approval rates across different types of financial institutions. While overall full approval rates have reached 51%—an improvement from pandemic lows but not yet at pre-pandemic levels—the combined full and partial approval rates tell a more nuanced story about market dynamics.
Credit unions and finance companies lead the market with identical 76% combined approval rates, followed closely by small banks at 75%. This clustering at the top suggests these institutions may be benefiting from their ability to make more personalized credit decisions. Online lenders hold the middle ground at 70%, while Community Development Financial Institutions (CDFIs) and large banks trail at 68% and 64% respectively.
Client satisfaction: clear market leaders
The data presents distinct patterns in client satisfaction. Credit unions and small banks lead the market:
- Credit unions: 81% satisfaction
- Small banks: 79% satisfaction
- Large banks: 61% satisfaction
- Online lenders: 40% satisfaction
These metrics underscore the enduring value of relationship-based banking models and personalized service delivery.
Demographic insights and market opportunities
Financing demand shows notable variation across different market segments. New businesses (0-2 years) demonstrate the highest demand at 76% seeking financing, followed by businesses owned by individuals aged 35-44 at 70%. The data also reveals robust financing demand among diverse ownership groups:
- Black-owned firms: 71%
- Hispanic-owned firms: 68%
- Asian-owned firms: 66%
- LGBTQ-owned firms: 69%
- Veteran-owned firms: 65%
Challenges and business responses
Small businesses continue to navigate complex operational and financial challenges that directly impact their financial health and borrowing needs. The data reveals the primary pressure points that are reshaping how businesses operate and manage their finances. They face three primary operational challenges:
- 54% encounter hiring and retention difficulties
- 53% struggle with customer acquisition and sales growth
- 41% continue managing supply chain disruptions
They also face the following financial headwinds:
- 77% struggle with rising costs in goods, services, and wages
- 52% report uneven cash flow
- 49% report weak sales
- 34% experience difficulty making payments on debt
- 29% do not have sufficient access to credit
In response, businesses have implemented various adjustments to their operations:
- 54% have increased prices
- 53% have utilized personal funds
- 51% have deployed cash reserves
- 40% borrowed capital for their business
- 34% downsized
Strategic opportunities ahead
For small business lenders and other organizations that support the small business ecosystem, this market intelligence presents clear strategic opportunities. The data suggests successful engagement with small business clients requires:
- Tailored financing solutions that acknowledge varying debt capacities
- Specialized programs targeting high-demand segments
- Enhanced support services addressing operational challenges
- Relationship-based approaches that drive higher satisfaction rates
- Partnerships with organizations like Grow America that can lend to businesses that fall outside of traditional banking criteria. If you’re interested in becoming a Grow America partner, you can get started here using the partnership inquiry form below.
As the market continues to evolve, small business lenders that align their partnerships, services, and loan product offerings with these emerging trends will be best positioned to capture market share and develop lasting banking relationships that support small business growth and success.