How Different Are Rural and Urban Small Businesses?
Small businesses play a big part in rural communities. In addition to serving local demand, businesses with fewer than 500 employees account for over half of rural employment. As part of the Richmond Fed's mission to strengthen the economy and our communities, we work to understand economic and business conditions in small towns and rural communities. This includes understanding how rural businesses in the Fifth District are faring and keeping a pulse on the financial health of rural small businesses. Using newly released data from the Small Business Credit Survey (SBCS), a national data collection effort from the 12 Federal Reserve Banks, we explore credit access and outcomes for rural small businesses with employees across the U.S.
The Federal Reserve has long monitored rural and urban credit conditions for businesses. In past years, the SBCS data showed several clear distinctions between rural and urban small businesses. Rural businesses were generally older and more financially stable; they were also better positioned to access financing when needed. The most recent data reflected some of these past trends, while also showing that rural and urban small businesses shared similar performance characteristics. One notable difference that persists is rural businesses' reliance on small banks, which reinforces the role of small community banks in rural communities.
Rural Small Businesses Are Older, Less Inclined to Seek Credit for Expansion
Historically, firm age has been a differentiating factor between rural and urban small businesses — rural businesses tend to be older than urban businesses. This trend continued in 2024: 36 percent of rural businesses and 28 percent of urban businesses were 21 years or older. There's a difference in age of the primary owner as well. In the 2024 survey, 27 percent of rural firms were owned by someone 65 or older compared to 22 percent of urban firms.
The shares of rural and urban firms that seek financing to expand their business largely move together over time, although the share of rural small businesses is consistently lower. In 2016, 57 percent of rural businesses that applied for financing did so to expand their business, compared to 65 percent of applicant urban firms; by 2023, the shares converged to a 2-percentage-point difference (44 percent of rural small businesses and 46 percent of urban small businesses). In 2024, the shares diverged slightly to 41 percent and 47 percent for rural and urban businesses, respectively.
Meanwhile, other measures of firm performance looked similar between rural and urban small businesses. Almost 40 percent of rural and urban firms experienced revenue growth in 2024, and about a quarter of rural and urban businesses increased their workforce. About half of rural and urban firms reported little employment change over the same time period.
In keeping with past trends, rural businesses remained somewhat less likely than urban businesses to expect an employment increase over the next 12 months, with 33 percent of rural businesses expecting to increase their workforce, compared to 38 percent of urban businesses. Furthermore, only a small percentage, around 12 percent for rural and 11 percent for urban, expected to downsize. Fifty-five percent of rural and 51 percent of urban firms anticipated employment numbers to remain unchanged.
Rural Small Businesses Are More Likely to Apply for and Receive Traditional Financing
From 2016 through 2022, rural and urban firms were about equally likely to apply for traditional financing, including loans, lines of credit, and merchant cash advances. But in 2023 and 2024, rural small businesses were more likely to apply for traditional financing than urban small businesses. The difference was largest in 2023 when 43 percent of rural small businesses applied for a loan, line of credit, or merchant cash advance compared to 36 percent of urban small businesses. The rural application rate for traditional financing dropped to 39 percent in 2024, while the urban application rate held steady at 36 percent.
Rural businesses are also more likely to be approved for the traditional financing they sought. Even with a post-pandemic dip in approval rates across geographies, a consistently higher share of rural businesses received the full amount of financing that they applied for, relative to urban businesses. In 2024, 59 percent of rural small businesses that sought traditional financing were fully approved, compared to 50 percent of urban businesses.
Small Banks Have a Bigger Role in Rural Areas
A variety of factors influence where small businesses turn for financial products and services, including interest rates, products offered, relationships, and geographic proximity. While there are some similarities in the financial services providers used by rural and urban firms, there are also notable differences. For example, rural small businesses are far less likely to use a large bank and far more likely to use a small bank than urban firms.
This translates to credit applications as well. Rural businesses are far more likely than urban businesses to seek financing from a small bank. These data are not unexpected, as rural areas tend to have a high concentration of small banks that may be better positioned to serve the unique needs of their community than a larger bank. Furthermore, smaller banks are able to focus on building partnerships and trust within their community, which may create higher demand for their services from local businesses. The survey data show how much relationships matter to rural small businesses. Among small bank applicants, 81 percent of rural businesses cited an existing relationship as a factor that influenced where they applied, compared to 66 percent of urban businesses.
We Want to Hear from Businesses
Over time, we have seen rural and urban businesses begin to converge in certain areas yet still retain unique and distinct qualities. As such, it is important that the Federal Reserve Banks continue to hear from national and regional small businesses. The next iteration of the SBCS will open in the fall of 2025. Business support organizations and business owners can contribute to this important data collection effort: Sign up to become a distribution partner or to take the survey.
Whether or not you're a large or small business located in the Fifth District, the Federal Reserve Bank of Richmond is interested in hearing about your experiences. We encourage firms to sign up for our monthly business surveys.
Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.
