New report reveals experiences and financing behaviors of nonemployer firms on the cusp of hiring staff
A new report titled “2025 Report on Nonemployer Firms: Findings on Hiring Plans from the 2024 Small Business Credit Survey” delves into the experiences and challenges of nonemployer firms—those with no paid employees except the owner(s)—that are on the verge of transitioning into employer firms.
Just released by the Federal Reserve, the report finds that while “potential employers,” or nonemployers that plan to add employees in the next 12 months, are more likely to apply for financing, they face higher denial rates than “stable” nonemployers, or those that do not plan to add employees during the same period. Also explored are financial performance and the types of financing various firms tend to use.
What are nonemployer firms?
Nonemployer firms are those with no employees except the business owner(s). The Small Business Credit Survey asks all nonemployer firms about their future hiring plans. This report compares the experiences of nonemployer firms that are potential employers (those that plan to hire employees in the next 12 months) to those of stable nonemployers (those that do not plan to hire). It further distinguishes potential employers as early-stage (firms that are 0–2 years old) and later-stage (firms that are more than 2 years old).
Compared to stable nonemployers, potential employers are more optimistic about their prospects for growth, but early- and later-stage potential employers differ from one another in several ways.
As is typical with new small businesses, most early-stage potential employers are not yet profitable but are very optimistic about revenue growth. Later-stage potential employers are nearly as optimistic as their early-stage counterparts about their growth prospects but were less likely to report revenue growth in the prior year. About half of later-stage potential employers use contract workers, and some had employees previously.
Key findings
- Compared to stable nonemployers, potential employers were more likely to report that they had experienced financial challenges in the prior year. Additionally, they were more likely to apply for financing, most often for expansion. However, when they did apply for financing, they were less likely than stable nonemployers to be approved.
- Early-stage potential employers were more reliant than other nonemployers on their owners’ personal funds. Additionally, 58% of early-stage potential employers had applied for new financing in the prior 12 months, with credit cards being the most commonly sought product. Among those that had applied for loans, lines of credit, or merchant cash advances, early-stage potential employers were more likely than other nonemployer applicants to be denied (50%, compared to 42% of later-stage potential employers and 34% of stable nonemployers).
- Later-stage potential employers were more likely than other nonemployers to have debt, and 61% had applied for new financing in the prior 12 months. Among those that had applied for loans, lines of credit, or merchant cash advances, later-stage potential employers were more likely than other nonemployers to apply for Small Business Administration (SBA) loans or credit lines. They were also more likely to apply at online lenders.
Why this matters
- Growth potential: Nonemployer firms that plan to hire represent a significant segment of small businesses that report growth potential.
- Financing trends: The report offers a detailed look at the financing needs, choices, and borrowing experiences of these firms, providing valuable insights for lenders, investors, and policymakers.
- Segment comparisons: It compares stable nonemployers with early-stage and later-stage potential employers, highlighting key differences in their financial situations, optimism about growth, and financing behaviors.