Just over half of the nation’s nonemployer firms were either unprofitable or broke even in 2017, with a majority also reporting rising costs, according to a new report.

Nonemployer firms are those without employees on the payroll.

The report also finds racial disparities in reported access to funding and highlights financing challenges faced by firms looking to hire employees in the near future.

That’s according to the 2019 “Small Business Credit Survey Report on Nonemployer Firms,” which the Federal Reserve Bank of New York (New York Fed) issued on Aug. 14. 

It examines the business conditions and the credit environment of small businesses with no employees other than the business’s owners. 

The report is based on the Small Business Credit Survey that was fielded in 2018. It offers a “deep dive” into the characteristics, performance, prospects and challenges of nonemployer firms nationwide, the New York Fed said. 

Nonemployer firms can include gig workers, startups that are planning to hire employees, and mature businesses that rely on contract workers as their workforce, among others.

“Nonemployer firms — which represent 81 percent of all small businesses — are an increasingly important part of our economy, and [the] report highlights how their performance has a real impact on American households,” Claire Kramer Mills, assistant VP at the New York Fed, said. “A majority of these firms struggle with making a profit, facing both rising costs and limits in passing on those costs to consumers. The data also underscore financing challenges for non-white business owners, echoing similar findings for employer firms.”

Findings

The report found 34 percent of nonemployers operated at a loss at the end of 2017. Firms with non-Hispanic, black ownership were more likely to report losses. 

In addition, a majority of nonemployers reported an increase in their input costs over the prior 12 months. However, only 34 percent of nonemployers increased the prices they charged, “suggesting challenges” with passing on these heightened costs, the New York Fed said.

The report also found that nearly three-quarters of nonemployers (72 percent) earn $100,000 or less in annual revenue. Lower annual revenues were more common among firms with younger decision-makers, firms with non-Hispanic, black owners, and women-owned firms.

At the same time, 15 percent of nonemployers leverage an app or online marketplace for the majority of their sales. This is more common among firms with younger decision-makers (18 percent) than with older decision-makers (13 percent)

The report found that nearly two-thirds of nonemployers reported having financial challenges in the prior 12 months. This was more common for firms with non-Hispanic, black ownership (76 percent).

In addition, 39 percent of all nonemployer firms reported their funding needs met, but only 17 percent of firms with non-Hispanic, black owners reported their funding needs were satisfied. 

About the report

The Small Business Credit Survey, a national collaboration of the 12 Federal Reserve banks, provides an “in-depth look” at the revenue and profitability of these firms and their owners, including financing needs, decisions, and overall success, per the report. 

Fielded in the third and fourth quarters of 2018, the survey yielded 5,841 responses from nonemployer firms, which are defined as businesses in the 50 states and the District of Columbia that have no full- or part-time employees.

The New York office of the National Federation of Independent Business (NFIB) is concerned about the new state law that forbids employers from asking prospective employees about their salary history. 

The new law, which Gov. Andrew Cuomo signed July 10, expands equal-pay laws to “prohibit unequal pay on the basis of a protected class for all substantially similar work,” Cuomo’s office said.

Supporters argue that the measure will benefit the push for pay equality, the NFIB noted. But the organization is against the new law, saying small-business owners “will likely face” the financial burden. 

“It’s just another administrative mandate complete with additional frictional costs that will make it that much more difficult for small businesses to hire the talent they need,” Greg Biryla, NFIB’s New York State director, said in a July 16 statement posted on the organization’s website.

The new law takes effect in early 2020, the NFIB added.

Cuomo signed the law, “a key component of his “2019 women’s justice agenda,” at the ticker-tape parade celebrating the World Cup champion U.S. women’s soccer team. 

The legislation prohibits all employers, public and private, who do business in New York state, from asking prospective employees about their salary history and compensation, and expands the definition of “equal pay for equal work.” 

The state law builds on two executive orders that Cuomo signed last year to eliminate the wage gap by prohibiting state entities from evaluating candidates based on wage history and requiring state contractors to disclose data on the gender, race and ethnicity of employees, “leveraging taxpayer dollars to drive transparency and advance pay equity statewide,” Cuomo’s office said.

Cuomo in 2017 directed the New York State Department of Labor to issue a report on the gender pay gap in New York and provide recommendations to “break the cycle of unfair, unequal compensation.” 

After holding pay equity hearings across the state, the state Labor Department released its report last spring, Cuomo’s office said.