Small business startups are twice as likely to be adding jobs and growing revenues than mature small employer firms, but due to higher credit risk are more likely to face financial shortfalls.

That's according to The Federal Reserve Bank of New York's 2016 Small Business Credit Survey: Report on Startup Firms. The report examines the results of an annual survey of small business owners with a focus on startup firms — defined as small businesses that were five-years-old or younger and had full- or part-time employees in 2016.

Relative to mature firms, startups are more likely to apply for financing, and when they do, typically seek smaller amounts of credit. Startups are most successful in getting financing approval from online lenders, but were the least satisfied with them, the report found.

These difficulties with securing sufficient financing were particularly acute for early stage (0-2 year old) startups, and they have a higher rate of failure than second stage (3-5 year old) startups.

These findings are particularly salient for the U.S. macroeconomy because startups account for 34% of all U.S. employer firms, for nearly all net new job creation and for almost 20% of gross job creation—according to outside research as of 2014.

“Startups are the primary drivers of U.S. job growth and their success is essential to a healthy economy,” said Claire Kramer Mills, assistant vice president and community affairs officer. “Although financing is important for all companies, it’s especially critical to these young firms who need funds to weather initial costs and grow. Despite startups’ strong demand for financing, their problems are more acute than other firms, with most facing shortfalls and many discouraged from even applying.”

Key findings can be found in the Report on Startup Firms' executive summary. These findings include:

Performance and expectations

• Startups were twice as likely as mature firms to be adding jobs and growing revenues (43% versus 22%), yet more likely to be higher credit risk.
• Startups were also much more optimistic than mature firms about future revenue and/or employment growth.

Financing Demand and Challenges

• Startups were more likely than mature firms to apply for financing (52% versus 42%), but tended to apply for smaller amounts (63% versus 49% sought $100,000 or less in financing).
• Startup applicants were more likely than mature applicants to face financial shortfalls (69% versus 54%). This disparity remained even when startups had comparable credit risk levels to mature applicants (53% of low credit risk startup applicants had financing shortfalls versus 41% of low risk mature applicants).
• More than half of startup nonapplicants were either avoiding debt (27%) or discouraged from applying (27%), compared to mature applicants (27% and 13%, respectively).

Financing Sources, Success and Satisfaction

• Banks were the most common source of loans/lines of credit for startup applicants, but medium/high credit risk startup applicants were much more likely to apply to online lenders than low credit risk startup applicants (39% versus 11%).
• While startup applicants were most successful at online lenders overall (76% approval for low credit risk startup applicants and 45% approval for high credit risk startup applicants) they were least satisfied with them (23% were satisfied at online lenders compared to 31% at large banks and 48% at small banks).
• Although startup and mature applicants had similar application rates for loans/lines of credit, startup applicants were much more likely than mature applicants to use credit cards for their businesses.

Additional reports on the 2016 Small Business Credit Survey will be released throughout this year. These will take an in-depth look into other specific types of small businesses, including microbusinesses, minority-owned firms, women-owned firms and the self-employed (nonemployer firms).