Tuesday, March 19, 2019

Small Business Loan Statistics 2019: How Your Industry Affects Your Loan Chances

There are common characteristics for small businesses across various industries when it comes to loan success and failure rates. It is vital for all businesses to secure finance before their campaign is fully launched. The two most common reasons for small business failure are (a) cash flow issues (b) starting off with too little money. This is true for all small businesses across various sectors. A small business is defined by the Small business Association (SBA) as a business with less than 500 employees.

As per the Bureau of Labor Statistics, the failure rate for small businesses is consistent across most industries at roughly 20% in year one. Health and social care tend to have a higher success rate while construction ranks among the lowest. Generally, the differences are not huge, though specific industries within common categories can skew the figures.

However, this does not accurately reflect the reality of getting a loan from an online lender, institution, or bank. Because of various stigmas, certain industries have been denied financing and may find it more difficult to acquire a loan.

The Restaurant Failure Myth

It is commonly believed that attaining a restaurant loan is incredibly difficult to do . This is due to the preconceptions that institutions have that restaurants always fail and are risky, with a high probability of failure in the initial phases. But as can be observed below, both of these points are false. Restaurants have a similar failure rate and a similar loan success rate compared to most other sectors.

As per official data, the failure rates for restaurants are not different from other industries. A commonly cited statistic is that 60% of restaurants close within the first year. But according to the SBA (the authority for small business research in the USA), the figure is closer to 20% (the typical average), and the failure rates for all small businesses are similar:
For employer businesses, survival rates as businesses age followed similar patterns for manufacturing, retail trade, food services & hotels, and construction. The fact that the food services industry shows no greater propensity to fail runs counter to the myth that restaurants are a relatively risky business

The takeaway is that restaurants are not riskier than any other industry and they are treated much the same by banks as other small businesses in terms of applying for a loan. However, some industries do have lower rates of default and are more likely to secure funding for an SBA(7)(a) loan. After all, the banks are going to take the industry failure rate into account when determining a loan, as they always rely on the hard data. Outlined below are some of the loan failure rates per industry.
Latest SBA Loan Failure Rates by Industry Code

As per the official data from the Bureau of Labor Statistics, the rate of failure for small business enterprises is 20% in year one, 30% in year two, 50% in year 5, and 70% in year ten. This is more or less the same across industries, even accounting for economic upsets. But loan success rates are an entirely different story.

Dried and Dehydrated Food Manufacturing (311423)
Wine and Distilled Alcoholic Beverage Wholesalers (422820)
Industrial Building Construction (236210)
Highway and Street Construction (234110)
Full service restaurants (722110)
All Other Miscellaneous Store Retailers (453998)
Internet Publishing and Broadcasting (516110)
Limousine Service (485320)
International Trade Finance (522293)
Public Finance Activities (921130)
Shellfish Fishing (114112)
This is just a small sample from an extensive list. It does not investigate why specific industries have high or low success ratios, though it is usually associated with the specific rate of default per industry. The sectors with the greatest rates of loan defaults include housing and mortgages, jewelry, siding contractors, associated real estate service, computer and computer peripheral equipment, software merchant wholesalers, travel agencies, and department stores.

In comparison, the lowest default rates by industry include breweries at 3%, support activities for oil and gas operations at 4%, veterinary services ar 4.3%, funeral homes and services at 6.5%, and offices of physical, occupational, and speech therapists at 7.8%.
Latest SBA Statistics – What Else Affects Loan Chances Aside From Industry?

According to the latest SBA release current as of 14 of December 2018, women account for only 28% of all SBA (7)(a) loan approvals, compared to males at 72%. 45% of approved loans are in the region on $350,000 to $2,000,000, 37% towards those that are over $2,000,000, 11% towards those between $150,000 to $300,000, and just 7% towards those that are under $150,000. 48% of total loan approvals go to businesses that are more than 2 years old, 12% toward those that are less than 2 years, 17% to startup companies, and 23% to businesses undergoing a change of ownership.

All these data points demonstrate that bigger and older loan applications are more likely to have success in their application, likely due to improved circumstances such as revenue and credit history. Moreover, they are not limited to just the SBA (7)(a) offering. The SBA 504, another loan offering, shows almost identical percentages. The SBA 504 is designed to facilitate the purchase of fixed assets, typically real estate, building, and machinery, at below market rates.

In terms of ethnicity, whites account for 49% of all loans, with 23% Asian, 17% undetermined, 7% Hispanic, 3% black, and 1% American Indian. Like women, minorities are more likely to start a business without financing from a bank. As can be seen from the SBA office of advocacy report on small business financing options by ethnicity, 8.1% of non-minorities are likely to get a small business bank loan compared to Asian (7.0%), African American (3.2%) and Hispanic (3.6%).

However, it should be borne in mind that this is due to the fact that there are greater numbers of white male businesses that are applying for loans and in a position to succeed. It does not necessarily imply any kind of bias in the loan system itself, which have a rigorous and mathematical process of determining the success of each individual application. The information is also voluntary as per the SBA disclaimer:
“The information being provided above is derived solely from Agency records that are submitted by the Agency’s participant lenders engaged in making SBA loans. This information is collected by the lenders from SBA loan applicants who provide it on a voluntary basis. It is then forwarded by the lenders to SBA”

Small Business Industry Failure Rate

The industry failure rate can vary depending on which data and which algorithm is used. According to an article published in Small Biz Trends, the present 5-year failure rate for companies by sector is:

Mining - 51.3% failure rate
Manufacturing - 48.4 % failure rate
Services - 47.6% failure rate
Wholesaling and agriculture - 47.4% failure rate
Retailing - 41.1% failure rate
Finance, Insurance, and Real Estate - 39.6% failure rate
Construction - 36.4% failure rate
These figures are based on companies founded in 2005 and are based on data obtained from the official Census Bureau’s Business Dynamics Statistics. Dangerous industries will have a harder time securing a small business loan, despite showing strong fundamentals. This is easily observable with the approval rate of risky industries such as public finance activities.
Who Supplies All the Small Business Loans?

The most common provider of small business loans is still banks, with the guarantee provided by the SBA for most loans. As per Finder.com, small businesses borrow over $600 Billion each year, a figure bigger than the entire GDP of Sweden. Large banks are responsible for 48% of total small business loans, with small banks responsible for 47% and online lenders responsible for 24% (businesses often apply to multiple lenders in a calendar year).

However, these figures do not accurately reflect the fact that online alternative lenders are increasing and gaining ground on a yearly basis in comparison to traditional lending models. It is also worth taking into account that many times banks do not approve the full amount in comparison to alternative lenders.

Moreover, the total amount lent could consist of a greater number of larger loans as opposed to alternative lenders who provide financial access of smaller figures to startups that really need it. The bank loans also come with a longer approval time and increased documentation, all variables that need to be taken into account when considering a loan application. Some alternative options are provided below.
Alternative Options

Just because you are in an industry with a low application success score does not mean that there are no options available. There are a wide variety of alternative lenders available that you can make use if.FundBox, OnDeck, and Kabbage are great online providers of term loans and business lines of credit for start-up businesses.

They can be a great alternative to the typical SBA (7)(a) loans. Even with less than stellar credit, the application can be filled in within an hour and the money can be deposited within one business day. For small business loans, sites such as Lending Club provide a peer-to-peer lending platform where borrowers and lenders can be brought together using the terms and conditions on the platforms. Given the small success rate of SBA loan applications, alternative lending options can be ideal.

Of course, it could still be possible to get a loan with a bank. If you do happen to have an excellent credit rating, a good industry, significant collateral, and time to go through the application process, then it may well be a good idea to apply for a typical startup loan. These loans do offer more generous interest rates. But with online lenders such as OnDeck or Kabbage, the loan can be inside your account within 24 hours with minimal fuss. It can also be a good way to repair a bad credit rating. There are also business loans for bad credit which can be ideal for certain enterprises.

It is important to remember that there is a large cross-section of data in terms of loan success rates. The success of any given loan will depend on your industry, credit history, revenue, collateral, time in business, and many more variables. So even if you are in an industry with a low success ratio (such as Shellfish fishing, with a 22% success rate), you can still optimize your chances. The decision has to be made whether you want to proceed with a lengthy loan process or to try and get a faster loan with an alternative lender.

There are also many types of loans to choose from. An unsecured business loan without collateral can be obtained from multiple lenders, but the rates are typically high. Business lines of credit are flexible kinds of loan where you only take out what you need and pay interest on that amount. There are also loan variants such as invoice factoring. Technically, invoice factoring is not a loan, but where a business sells its invoices to a factoring company at a discount in exchange for cash.
So How Does My industry Affect Loan Chances?

The industry you are in will affect your loan chances. Standard retail outlets such as restaurants and shops will have around a 20% chance of attaining an SBA(7)(a) loan. This can be contrasted to breweries, gas and oil support services, and commercial equipment leasing, which have a large approval rating. This is because they are niche industries with a very low default rate.

However, the 20% statistic only applies when going for a typical bank loan or an SBA (7) (a) loan. When using an alternative online lender, the loan process is completely streamlined. OnDeck, for example, requires a credit score above 500, a year in business, and $100,000 in gross annual revenue.

Once these criteria are satisfied a loan is very likely. However, there are still a select number of industries that OnDeck will not serve. These are Adult Entertainment, Drug Dispensaries, Firearms Vendors, Government & Non-Profits, Public Administration, Horoscope and Fortune Telling, Lotteries, Casinos, Money Services Business (MSB), Religious, Civic Organizations, Rooming & Boarding Houses. Many other online loan operators will have similar restrictions, simply because these industries are more likely to default on their small business loan obligations than their more stable counterparts.

One item that is common across all industries is that small business enterprises who do not get access to finance via loans have a higher failure rate. As per a research paper on small business lending by the Harvard Business School;

As the online marketplace evolves, those who succeed will be the ones who have access to low-cost capital and those who can best access and serve the small business customer, creating products that fit their needs and ensuring that small businesses find their way to the loans that work best for them

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