What small businesses need to know about the evolving US credit market

What small businesses need to know about the evolving US credit market

Small business credit access varies wildly by state, leaving entrepreneurs in some regions facing significantly higher rejection rates and limited financing options compared to others. Nationally, small businesses using credit report operational benefits. But state-by-state data tells a different story, reports Plains State Bank, a personal and business banking service provider based in Texas.

How Small Businesses Use Credit

The 2025 Fed Small Business Credit Survey focusing on nonemployer firms shows how the credit market functions and what lending trends underpin it. It found that 58% of companies that are classified as early-stage potential employers sought financing in 2024, prioritizing credit card products as a means of achieving improved operational agility. Of this group, 50% were denied their credit application, indicating a degree of instability in credit availability at this level.

Conversely, 61% of late-stage potential employers that still fall under the nonemployer classification sought credit during this period, and 42% were denied it. Among this group, Small Business Administration (SBA) backed loans were more commonly sought, and online lenders were also a primary target for credit applications.

Further analysis of Federal Reserve data by the Urban Institute pinpoints several other figures, comparing in particular the differences between how nonemployer firms and employer firms use the credit market. Researchers found that in terms of the success rates for getting some or all of requested financing, 40% of those in the former group met this measure, compared with 34% in the latter. Microbusinesses have a better chance of being approved for some form of credit, even though larger small businesses with employees might seem like safer bets to lenders.

The data shows the diversity of the credit market in the U.S. Small businesses are not tied to one funding avenue, but may pick and choose from a range of options, whether that’s a strategy driven by credit card spending or an approach more reliant on traditional bank loans.

How States Differ

The Fed’s research into small businesses offers state-level data on credit use and the state of the market, all pulled from the same survey. Small businesses in this context are defined as those with fewer than 500 employees. State-level data reveals significant differences. Texas, Washington, New York, and California illustrate the range.

Texas

Texas was slightly above the national average across all metrics of financial challenges in small businesses, with 75% of firms reporting that rising costs were a problem, while 52% reported uneven cash flow. Despite this, it aligned with the expected responses to these challenges, mirroring national trends of taking out debt at 37% and matching the use of personal funds at 54%.

Texas small businesses stood out when considering outstanding debt. Fifteen percent owed around $25,000, above the 10% national average. Thirty-two percent had no debt whatsoever, while 6% owed over $1 million. Moreover, financing and credit options chosen were distinct from national trends, with 56% of small businesses in Texas using credit cards, compared with 62% at a country-wide level, and the loan use difference sitting at 38% to 44%, respectively. This aligns with the Fed’s findings that 67% of small businesses in the state anticipate increased revenues in the coming 12 months, well above the 56% national average.

Washington

Compared to Texas’s relatively bullish outlook on revenues, just 43% of Washington small businesses anticipate an uptick this year, while 37% predict stagnation, and 20% a decline. Despite this, 50% reported their financial condition to be fair, compared with 35% nationally. Moreover, 91% complained of increased costs, and 55% of uneven cash flow.

Washington’s small business credit use is a stark contrast to Texas and the rest of the U.S. Just 26% took on debt to cope with challenging financials, while 71% raised prices as a counterbalance, and 54% worked to cut operational costs. Credit card use was again rife, at 75%, while 42% took out loans. Eighty-three percent of Washington small businesses adopted business-specific credit cards, way above the 58% national average. And for financial services, 40% chose a credit union, compared with the 14% average.

New York

New York saw above-average challenges according to the Fed’s 2025 Firms in Focus Chartbook, with 45% of small businesses operating at a loss, above the 34% national average. Meanwhile, only 39% were profitable, and 16% broke even. The coming year will be similarly bleak, with just 43% expecting revenues to increase, while 31% project a drop.

Despite this, the actions taken by New York-based small businesses do not reflect a rush to take on debt. Sixty-two percent used personal funds and 56% cut costs, while 40% made use of credit products; only slightly above average. In terms of financing and credit product use, New York’s figures largely aligned with national averages. Notably, companies in this state were more likely to choose a large bank for financial services, likely due to New York City’s influence.

California

Its status as one of the most powerful economies in the U.S. remains, but Fed data suggest California faces many of the same challenges as its counterparts, at least from a small-business perspective. Just 10% of firms in this category described their financial condition as very good or excellent, both below national averages, while 26% defined their condition as poor.

Here, challenges are dealt with slightly differently as well. Sixty percent used personal funds, 42% took out debt, and 31% downsized, all above average figures. Credit card use was also higher, with 70% of compact companies in the state relying on this financial product regularly. Sixty-eight percent applied for financing of some kind in the past year, with 64% citing operational expenses as the main motivator for this step.

Ongoing Uncertainty

How small businesses use the credit market may differ from state to state, but the obstacles they face in securing additional financing tend to be quite consistent. Rising operational costs month on month, with inflation the driving force, leave small firms facing options about how to deal with them.

Washington bucks national trends by using price increases to achieve stability. The optimistic outlook among Texas companies for revenue increases in the coming year explains why more of them are willing to take on smaller loans, repaying them in the short term.

Without access to reliable financing at the state level, entrepreneurs face a widening gap between regions with strong credit markets and those without.

This story was produced by Plains State Bank and reviewed and distributed by Stacker.