Over the past few weeks, the Small Firm Diaries research team has been visiting US cities to share what we're seeing in the data so far—stopping in St. Louis, Chicago, Baltimore, Atlanta, and New York, with Oakland still ahead on May 26. These conversations have been useful in both directions: hearing where our findings on growth, credit use, and jobs resonate with local audiences, and hearing the questions and pushback that have helped us sharpen our thinking.
A caveat worth stating upfront: we're roughly halfway through the research, with data still being gathered, cleaned, and analyzed. Specific numbers may change. With that in mind, here's some of what we've been discussing.
About the firms
The roughly 80 businesses in the study are mainly clustered in six US cities, all operating in low-income areas, because FAI's focus is on understanding how to make financial services work better for people who are struggling economically. We also required that firms have been in operation for at least two years, because more than half of all firms close before hitting that mark, and an 18-month study with a small sample needs most participants to still be in business at the end.
More than half the firms have female owners; more than 60% are minority-owned; more than 70% of owners are 36 or older. What stands out about household income is how central the firm is to it: these are not hobby businesses, but primary sources of livelihood for the owner, if not the entire household.
On size: as we've written before, we focused on firms with at least one paid worker and no more than 20. Less than half had any paid workers when they first opened; of those that started solo, nearly two-thirds hired their first worker within the first year. Today, the average firm is paying about seven people—a figure that includes W-2 employees, 1099 contractors, and workers paid off the books—a distinction that matters, as we'll get to.
Growth, despite the headlines
The businesses in the study are, by and large, doing better than the headlines might suggest.
Revenues, profits, assets, and headcount are all up from when the firm started, and about 70% met or exceeded their own expectations for growth in the past year. This could be partly a function of who's in the study—owners that were optimistic enough to start a business, and resilient enough to last two years. But survivorship alone doesn't explain optimism about the future, and 80% expect to be larger a year from now. Whether that optimism is warranted is something we'll be watching closely as we continue to collect data.
The credit story
A lot of programs and policies aimed at small firms start from a premise of credit scarcity: the theory of change is, roughly, get more capital to these businesses and they'll grow. That’s not quite the story we’re seeing.
Most firms in the study have some access to credit. Business and personal credit cards are nearly universal. And the majority of firms (around three-fourths) do have credit on their balance sheets. So the question is less “do they have access?” and more “is it affordable, is it serving them, and what are they actually doing with it?”
When we ask how firms manage their hardest financial moments, credit is in the mix, but so is skipping payment to themselves, dipping into personal funds, and cutting staff hours. Two of the top three coping strategies shift the burden of volatility directly onto the owner. To us, this suggests that none of the tools available to the firms is fully sufficient.
The investment picture is also telling. Two-thirds of firms made new investments in the last year, but two-thirds of those did it without taking on new credit. Looking ahead, only 40% plan to use credit to fund future investments. They're growing, but not primarily through debt financing.
This is a puzzling finding that merits more digging in the coming months. It could be risk aversion—owners are wary of what credit costs and what it obligates. It could also be that the credit available to them isn't well-suited to how they actually need to deploy capital. "They need more access to credit" is a simple policy story, but it’s probably not the right one.
Jobs: net positive, with some big asterisks
The preliminary data showed that a large majority of firms had a net increase in paid workers over the past year. In an environment where national job creation is historically weak, this is noteworthy.
But net numbers can hide quite a lot. As we’ve written, capturing the true nature of small firm employment is much more challenging than it appears. When we plot headcount firm by firm over time, what we see isn't a smooth line upward but rather more of a tangle.
But even this chart doesn't show the whole picture—it's a six-month snapshot and doesn't capture wage fluctuations or worker turnover within a stable headcount. A firm with the same headcount in October as in April may have cycled through several people in between. Annual snapshots miss this entirely, which is one of the core arguments for doing this kind of high-frequency data collection.
In another sign of how central the jobs question is, hiring and retention tops the list of challenges owners cite. And yet, when we ask where owners are actually spending their time, it's not at the top. While what they say they spend most of their time on—acquiring customers and improving processes—could also be a good use of time, that gap is something we want to understand better. One reading is adaptive: I can't control the labor market, so I'll work on what I can control. Another reading is more concerning: I don't know what to do about it, so I’ll spend my time elsewhere.
Growth on whose terms?
The conversation that has stayed with us most across all six events is about what these owners actually want from their business. We ask them to place themselves on a scale from “stability, lower risk, lower growth” to “growth, higher risk, higher reward.” Most cluster in the middle: they’re not trying to build the next billion-dollar company, but they're also not contentedly staying put. They are something in between.
Firm owners’ goals reflect this same posture: wanting to grow, but in a steady, stable way. The one incongruous note worth paying attention to here is the very low number of business owners that say they want to delegate responsibilities to others—the thing that actually enables a business to scale. A firm owner that isn’t building the capacity to step back from day-to-day operations is going to quickly reach a hard limit on growth.
We’ve watched a more pronounced version of this play out in our international work (see Big Challenges for Small Firms, page 8). The small firms we got to know in Kenya, Nigeria, Indonesia and elsewhere operate with slim margins and low liquidity, so the jobs they create are volatile and sporadic. Workers, in turn, have less incentive to perform well for firm owners who are unlikely to invest in their future. This creates a very low-level equilibrium which we’ve called the trust trap. The trust trap is hard to break out of, and it’s a drag on productivity for both the firm and the worker. We see traces of this among the US firms as well, for instance in the jobs volatility we've already described, and in that reluctance to delegate. Whether those traces resolve into a pattern—and ways the US context may produce a different dynamic—is one of the questions we’re most focused on in the second half of the research.
The Conversation continues
We'll have more to say on all this at a faiVLive online webinar on April 29. If you couldn't make it to one of the in-person events, this is where to catch us, along with some great panelists—Sherri Lane from NYC Small Business Services, Joyce Klein with the Aspen’s Institute’s Economic Opportunities Program, and Tonya Rapley with Access to Capital for Entrepreneurs. Register here.
With panelists and hosts at the Mastercard Hub in Atlanta.