Source: https://tinyurl.com/rn455geWrtitte by: Jared Hecht
For nascent businesses, that might mean a small loan from your family or friends, but as your business continues to grow, you may have to explore the possibility of larger financing solutions from a bank or alternative lender. In fact, nearly half of all small businesses applied for a loan last year.
While almost any type of small business can qualify for a loan (a few industries, such as gambling or speculative house-flipping, may be blacklisted by lenders), some industries tend to obtain more funding than others.
Why would one industry qualify for more overall funding than another? Lenders consider businesses within some industries to be less risky and more likely to repay their debts, due to their potential for high revenue and profitability, among other factors.
Whether you’re still exploring the idea of starting a business and want to know which industries are most likely to receive funding, or you want to see what your chances are of being approved for a large chunk of capital for your existing business, knowing which businesses get the most funding can help you better plan for the future. Which Small Businesses Receive The Most Funding?
According to Fundera’s State of Small Business Lending Report 2020, these were the 10 industries that received the most funding from lenders in the prior 12 months:
- Retailing Electronics
- Auxiliary Health Services
- Physicians/Doctors Office
- Strategy/General Consulting
- Manufacturing Other Merchandise
- Software Development
- Hotel, Motel, Lodging
What Separates These Businesses From The Rest?
There are a few factors that make one small business—in the eyes of a lender—a safer bet to repay a loan than another. They include:
- Proof of revenue: Revenue is what gets you in the door for most lenders. Lenders will analyze several months of bank statements when reviewing a loan application, which will give them a sense of the business’s average bank balance and how well they manage their money. If you show an ability to generate revenue based on a solid business model, many lenders will be interested in working with you.
- Profitability: It’s one thing to generate money—it’s another to generate profits. Only businesses that are profitable (and highly profitable, at that) will qualify for large, long-term loans such as bank loans and SBA loans.
- Good personal and business credit scores: Showing that you have a history—as both an individual and a business owner—of repaying your debts on time is, of course, a great sign to lenders.
- Time in business: The longer you’ve been in business, the better you look to a lender. A brand-new business (even one that makes a ton of money out of the gate) can’t demonstrate the longevity that one with a decade of business history can. Lenders want to work with businesses that will be around for a while—and if you’ve already shown you can do that, all the better.
The Biggest Difference-Maker: SBA Loans
It’s worth noting that businesses that took out SBA loans received significantly more capital than those that funded through an alternative lender.
Not every business can qualify for an SBA loan. These are loans partially backed by the federal government, which means only businesses that can meet the requirements (which vary by SBA-lending bank, but may include strong personal credit scores or profitability) will be considered.
According to the SoSBL report, the average short-term loan through Fundera was for $52,709. The average SBA loan through Fundera? Over $211,300.
No wonder that industries like Creative/Marketing, Strategy/General Consulting, and Auxiliary Health Services made the short-list for most overall funding: They were all in the top-five in terms of businesses that received the most SBA loans last year.
Basically, if you’re eligible for an SBA loan—and you have a business need that correlates to one of the use cases for SBA loans, such as expansion or buying commercial real estate—you’re more likely to qualify for substantially more business funding than a business that isn’t.
What Does This Mean For Your Business?
If your business isn’t in one of these top-10 industries, that doesn’t mean you won’t be able to qualify for significant funding (assuming you need it).
It is worth noting what these top industries have in common—namely, a higher likelihood of demonstrating profitability and longevity.
If your business has trouble turning a consistent profit, is still young (less than two years in business), or has a middling credit history (perhaps due to some ill-advised purchases with a business credit card early on in your career), it’s time to start improving those facets of your business. That might mean adjustments to your business model, taking out a new business credit card, or continuing to operate until you’ve been in business long enough to justify a major loan.
Taking out a loan may not make or break your business—you may never need a loan, after all. But performing well on these metrics is a good goal for any business owner. Plus, you’ll be more likely to qualify for the best loan products on the market, if the day where you need a little extra help growing your business does come.