Report on Disaster-Affected Small Firms Provides Critical Insight for Understanding Regional Economic Recovery

• Firms with natural disaster-related damages faced insurance mismatches and sought credit financing but struggled with funding gaps

The Federal Reserve Banks of San Francisco, New York, Dallas, and Richmond today issued the 2017 Small Business Credit Survey: Report on Disaster-Affected Firms. This is the first in a series of reports this year examining the results of an annual survey of small business owners.

The Report examines the business conditions, insurance coverage and credit environment of small businesses located in FEMA-designated disaster zip codes. It compares firms that were located in natural disaster-affected areas but did not face damages (hereafter “unaffected firms”) to those that did (“affected firms”). This report focuses on U.S. mainland firms, since there will be a separate report on small businesses in Puerto Rico later this year.

The Report found that business losses were widespread in disaster areas. Insurance holdings appeared to be mismatched to the actual damage that occurred, leaving uncovered losses and highlighting the importance of credit financing for recovery. Additionally, affected firms applied for credit financing more than disaster relief, and most of them faced funding gaps.

“Small businesses are primary drivers of job growth and their ability to rebound from disasters is critical to regional economic recovery,” said Claire Kramer Mills, assistant vice president at the New York Fed. “This report reveals sizable financing gaps and significant mismatches between insurance holdings and actual damages—insight we hope will inform tactics for preparing for and responding to future natural disasters.”

“Because small businesses are such important economic drivers in our country, learning more about their levels of natural disaster preparedness is critical to understanding mechanisms of nationwide economic resilience and recovery,” Emily Perlmeter, Community Development Advisor at the Dallas Fed. “We find that although most firms that experienced disaster-related losses did have insurance, the types of coverage appear to be mismatched to the actual damage experienced. This leaves critical gaps that need to be addressed and better understood.”

“This report shows that while small businesses experienced significant asset damages, their pain was doubly felt due to lost revenue and employment gains as well. Also, we found that certain communities are more vulnerable to experiencing natural disasters and suffering related losses,” said Samuel Storey, Community Development Senior Research Analyst at the Richmond Fed. “By anticipating these disparities, financing sources can help address inequities in future recovery efforts.”

“In light of the increasing severity and economic cost of natural disasters, it is critical that small businesses have access to capital and other supports to successfully recover and build resilience for the future. This is particularly relevant for small businesses in neighborhoods that are low-income or have higher concentrations of people of color, as these communities were harder hit by disaster while also being more economically vulnerable,” said Laura Choi and Elizabeth Mattiuzzi, Community Development Research Manager and Senior Researcher in Community Development, respectively, at the San Francisco Fed.

Key findings, which can be found in the Report’s executive summary include:

Demographics and Expectations

• The natural disasters that struck during between late 2016 through 2017 were concentrated in the Southeast (North Carolina, South Carolina, Georgia, and Florida), Michigan, Mississippi, Arkansas, Texas and California.
• Some of the zip codes that were affected by natural disasters saw more than one type of disaster. The majority of them were impacted by hurricanes (82.3% of FEMA-designated zip codes), followed by severe storms (13.9%), then wildfires (4.3%).
• Individuals in disaster areas were more likely to identify as Hispanic or African American, and to be foreign born. However, their employment and educational attainment were similar to the United States overall.
• 40% of small firms in FEMA-designated zip codes had natural disaster-related losses.
  • Of those firms, losses were concentrated among Hispanic-owned firms and firms in the retail or leisure and hospitality industries.
• Despite recent challenges, affected firms expressed high and consistent levels of optimism about future employment and revenue that were similar to unaffected firms.

Financing Demand and Challenges

• For affected firms, foregone revenues—not assets—were the largest source of losses. 35% lost more than $25,000 in revenues.
• Affected firms reported sizable revenue and employment gaps and elevated incidence of financial challenges compared to unaffected firms
• Their insurance holdings appear to be mismatched to the sources of their damages, leaving uncovered losses.
  • For example, 65% of affected firms cited power or utilities issues as the source of their losses but only 17% had business disruption insurance.
• More affected firms applied for credit financing (48%) than disaster relief (27%).
• Affected firms also had small financing needs (62% applied for $100,000 or less) and were most likely to apply to large banks (52%).

Financing Sources, Success and Satisfaction

• Affected firms were more likely to experience a funding gap than unaffected firms (66% compared to 55%).
• Business loans and Small Business Administration loans or lines of credit were the most commonly sought financing tools for affected firms (53% and 45%, respectively).
  • However, across the most popular loan/line of credit products, they were less successful at receiving financing compared to unaffected firms.
• Affected firms more often sought loans or lines of credit from non-traditional lenders, including online lenders, compared to unaffected firms.

About the Small Business Credit Survey (Survey)

The Survey collects information about business performance, financing needs and choices and borrowing experiences of firms with fewer than 500 employees. Responses to the Survey provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The results are weighted to reflect the full population of small businesses. The Survey is not a random sample; therefore, results should be analyzed with awareness of potential methodological biases.

The Survey was launched in 2014 through an effort that merged the regional surveys conducted by several Federal Reserve Banks. The 2017 Survey is the second iteration that was conducted on a national scale with involvement from all 12 Federal Reserve Banks and input collected across all 50 states and the District of Columbia. It collected 14,465 responses in total. 1,892 of these small businesses were located in FEMA-designated zip codes and 748 of those firms faced natural disaster-related losses.