Small businesses, ultimately, are people with goals and values that can't be calculated on a profit-and-loss statement, a nominee for a high-level post in Donald Trump's administration observed during a confirmation hearing.

If they could be, it might be considerably easier for them to get the credit they need to add workers, buy inventory or simply stay afloat in the window between product delivery and customer payment.

Instead, according to a report by the country's 12 regional Federal Reserve banks published on Tuesday, Aug. 8, more than half of the startup firms that play an outsize role in U.S. job creation and innovation struggled to get loans. As a result, some 81% dipped into their personal funds to bridge the gap.

The trends help explain why the formation of new businesses -- which generate almost all net new job growth in the U.S. -- has been declining for years. Addressing that pattern is particularly vital to the Federal Reserve as it seeks to nurture an eight-year recovery in which employment gains have yielded only lackluster wage growth and inflation.

"Given the importance of startups for the economy, the question of startup capital is of central importance," according to the 2016 Small Business Credit Survey Report on Startup Firms. "While funding is the lifeblood of every company, capital is especially critical for startups. To reach scale, startups need to be able to secure expansion capital."

It's a conundrum that the Trump nominee, Linda McMahon -- who eventually won the Senate's approval to lead the Small Business Administration -- is familiar with, having co-founded the company that eventually mushroomed into World Wrestling Entertainment Inc. (WWE)

"It is very difficult to have access to capital and get loans when you really have no collateral against that except your own cash flow," she told the Senate Committee on Small Business & Entrepreneurship in January. "I know that there are a lot of startups that face those kinds of issues in getting capital."

A particular challenge for lenders is that startups, which the new report defined as companies less than two years old and employing less than 500 workers, tend to have higher credit risk. That counters assets such as being twice as likely as mature firms to expand payrolls and increase sales.

Indeed, while startups are more likely than older companies to apply for financing, some 69% obtained less than they sought. Among firms less than 5 years old, 28% of borrowers were turned down altogether, and only 31% were able to obtain the full loan they sought.

Access to credit is "especially critical to these young firms who need funds to weather initial costs and grow," Claire Kramer Mills, an assistant vice president at the Federal Reserve Bank of New York, said in a statement. "Despite startups' strong demand for financing, their problems are more acute than other firms, with most facing shortfalls and many discouraged from even applying."

U.S. STARTUP FIRMS BY REGION

Source: 2016 Small Business Credit Survey Report on Startup Firms; Federal Reserve Bank of New York
Source: 2016 Small Business Credit Survey Report on Startup Firms; Federal Reserve Bank of New York

Even when the fledgling firms had credit risks comparable to better established rivals, 53% encountered shortfalls while only 41% of mature businesses did.

The disparity appears largely due to the companies' shorter lifespan, since banks typically prefer borrowers with longer credit histories. Still, the rise of so-called fintech lenders, which rely on digital algorithms to evaluate creditworthiness from applicants whom traditional creditors might shun, has eased that challenge somewhat.

While startups still prefer going to small banks, they were more likely to be successful at online lenders, which gave at least partial approval to 76% of applications from low-risk borrowers and 45% from higher-risk customers, the report found.

What makes such loans particularly attractive is that they can often be granted in less than a day rather than the lengthier review period required elsewhere, a growth driver for an industry the U.S. Treasury Department estimates has a potential market as high as $1 trillion. 

"With traditional providers, you see a noticeable difference in their ability to make timely decisions," Mills said in an interview. "Online providers are rated much better on that dimension. Where online lenders score poorly is with higher interest rates. There's a lack of understanding among startups of exactly what the effective interest rates are and what the total borrowing costs are."

Still, the business model has proved sufficiently popular and lucrative that some of the country's biggest lenders are adapting it for themselves.

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For example, JPMorgan Chase & Co. (JPM) said Monday it was extending a partnership with OnDeck Capital Inc. (ONDK) -- to provide small-business loans using that firm's application, scoring and approval platform to speed up the process -- for up to four years.

The product, known as Chase Business Quick Capital, offers loans up to $200,000 for a term of up to two years, providing the money, in some cases, on the same day.

"We set out to simplify the conventional originations processes, which can take weeks to months -- time that many small businesses don't have," Julie Kimmerling, the head of Business Quick, said in a statement.

Competitor Wells Fargo (WFC) , meanwhile, introduced a similar loan in May 2016. Branded as FastFlex, the San Francisco-based bank's service offers customers with a business checking account a one-year loan of up to $100,000.

Updated from 1:22 p.m. on Tuesday, Aug. 9, 2017.

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