Small Business Loan Statistics & Definitions
I’ll bet you thought basic definitions would be the easy part, didn’t you?
As it turns out, what counts as a “Small Business” often depends on the type of business being discussed and not always what’s in your accounts receivable (AR) or payable (AP). Sometimes the number of employees involved goes well beyond 500; in other cases it’s as low as 250. In some industries the number of employees isn’t the issue so much as the dollar value of the business in terms of annual income OR annual employment costs (again – sort of, mostly, in general).
The SBA document breaking this all down is 49 pages long. I kid you not. Then again, considering that the SBA, however useful, is still a function of the U.S. Government, I suppose we should be thankful it’s not 4,900 pages.
If you do Construction Sand and Gravel Mining, Industrial Sand Mining, or Ceramic and Refractory Mining, and have fewer than 500 employees, you’re a small business. If you do Kaolin and Ball Clay Mining or Potash, Soda, and Borate Mining, you can have up to 750 employees and still be a small business. For Phosphate Rock Mining you’re allowed up to 1,000 people without losing your “small business” designation.
Crude Petroleum Extraction or Natural Gas Extraction can go up to 1,250 warm bodies and still be considered a “small business,” while in Bituminous Coal Underground Mining or Gold Ore mining you can retain your “small business” status with anything fewer than 1,500 employees.
You get the idea.
If your business is Men’s Clothing, you can make or hire up to $11 million annually and still be “small.” For Women’s Clothing, however, that range goes up to $27.5 million. Children and Infants’ Clothing, $32.5 million, which you should not confuse with a Family Clothing Store, which is still small up to $38.5 million. “Other Clothing Stores” cap out at $20.5 million, unless they’re a Shoe Store, which is still a small business until it consistently passes $27.5 million.
The point is, it’s different depending on what you do. This matters when we get to specific business loan statistics. The needs of large “small businesses” aren’t the same as those of smaller versions, just like the needs of one industry aren’t always the same as those of others. Business loan companies certainly don’t think so, and I want to be clear that we’re talking about a pretty wide range here.
Wait, but Small Means Small
Still, if you’re like me, none of these are what you first think of when you’re talking about “small business.” And you’re not wrong.
About 80% of small businesses have ZERO employees. Of those who do, most have only 5 – 6 in their early years. The overall average number of employees for ALL small businesses hovers at around 25.
Nothing against those Bituminous Underground Coal Miners, but most of the time when we’re talking about “small businesses,” we’re talking about SMALL businesses.
At the same time, when we’re talking about “small business loans” or “small business loan statistics,” we mean all of them. Welcome back, Potash, Soda, and Borate Miners! We weren’t trying to make you feel left out or anything.
Over the past decade, small businesses have been responsible for the vast majority of new jobs and increased employment. If you’re looking for meaningful job growth, small business is where it’s at.
Who’s Starting These Small Businesses?
Entrepreneurship is about three things: the “good idea,” the perseverance to make it work, and the willingness to take risks with absolutely no guarantee of reward. The first two aren’t easy by any stretch, but it’s that last one that bewilders those who aren’t entrepreneurs. They simply can’t imagine why you’d do what you do or give up what you give up, knowing full well that even if you do everything right, it might not work.
Of course for entrepreneurs the answer is simple: because it might.
Here are some highlights from the extensive statistics compiled by the U.S. Small Business Administration regarding who makes up the thirty million plus small business owners in the U.S. at the moment:
- Just over a THIRD (36.3%) are women.
- Almost a THIRD are (29.3%) minority-owned. About 12.2% are Hispanic-owned and another 9.5% are African American.
- A little under a ONE in TEN (9.3%) are veterans.
- Nearly 15% are started and owned by immigrants.
- Only about 4% are under the age of 30. Another 14% are 30 – 39.
- Things really start cooking at 40, it seems. Roughly 25%, or ONE QUARTER small business owners are between 40 – 49, and 35%, over a THIRD, are 50 – 59.
- Not that their elders are slacking. The remaining 22%, still more than ONE in FIVE are over the age of 60.
- Almost exactly a THIRD have a High School Diploma or GED as their highest academic achievements, at least in terms of traditional education.
- Nearly HALF have an Associate’s or Bachelor’s Degree, leaving about One in FIVE with a Masters or Doctorate.
What Types of Businesses Are They Starting With These Loans?
There are two ways to respond to such a question – one is to discuss the nature of the business itself, the other to address organizational choices. We’ll start with the latter.
This is by far the most common structure for a beginning business, and it’s one of the easiest to establish. Essentially, if you start doing any sort of work for which you receive payment or hope to receive payment, but you’re not technically an employee of someone else, then you’re a sole proprietor. Local entertainers, business consultants, or freelance writers are common examples of sole proprietorship. In fact, of businesses considered “non-employers” – that is, they don’t involve hiring anyone outside of the owner or owners – around 86% are sole proprietorships.
It might not always be obvious from the name. Sole Proprietors sometimes do business as themselves (“Bob Frankenfurter, Magician”) or file for a DBA – “doing business as” (“Magic-In-A-Jiffy Entertainment”). Either way, you are the business and the business is you. That makes the paperwork a little easier. Although you’ll file an additional page or two with your personal income taxes to include any business expenses or income.
Decisions are Yours
All business-related decision-making is entirely yours as well. Whether you work twenty hours a week or sixty, whether you re-invest every dollar or give yourself some flexibility through a business funding loan, it’s all entirely up to you. One hundred percent.
Finally, of course, any profits or benefits are 100% yours – as are losses and liabilities. You’re taking all the risk, so you get all the rewards as well as any failures. That includes any consequences from employee behavior as well. While most businesses with no employees are sole proprietorships, many sole proprietorships have several employees. If one of them screws up and damage is done, a lawsuit is filed, or money is lost, the owner is responsible just as if he or she did it themselves.
A recent survey of members of the National Small Business Association (NSBA) indicated that around 12% of members were a sole proprietorship.
You think marriage requires communication and compatibility? Try going into business together.
As the name suggests, a partnership is the combined ownership of two or more people. It is otherwise similar to a sole proprietorship, other than in how liability is distributed.
In a Limited Partnership (LP), one partner carries unlimited liability for any negatives which may occur while the other partner’s (or partners’) liability is legally limited. As you might suspect, this changes the power structure as well. Partners with limited liability also have limited direct control, the details of which are spelled out in their collective partnership agreement.
The alternative is a Limited Liability Partnership (LLP), in which all partners have limited liability and – unless otherwise specified in their agreement – share equal control over the business. LLPs protect partners from debts or other liabilities of either the business itself OR the other partner(s). The advantages of such protection are obvious.
Only about 2% of NSBA members indicated their business was a either an Limited Partnership or Limited Liability Partnership. That doesn’t make it a bad idea – just less common than other forms.
Limited Liability Company (LLC)
The Limited Liability Company structure allows business owners to retain the liability protection of a corporation while being taxed as a sole proprietor or partnership. Even if the business goes south, faces legal assaults, or otherwise ends up on the dark side of business loan statistics, the powers-that-be cannot come take your car, your house, or your personal financial resources to satisfy the debts of your business or any claims against it. It’s a whole separate entity, at least legally.
LLCs dissolve easily upon the death or other removal of any of the owners or partners, or after a set amount of time – usually thirty years. They are very popular for mid-sized and growing businesses. However, for the nice compromise they offer between operating as a sole proprietorship vs. a large corporation.
Just over a third of NSBA members (35%) reported their business as an LLC.
Corporations (sometimes called “C-Corps”) are, legally speaking, entirely separate from their owners. They profit as legal entities, pay taxes as legal entities, may sue or be sued as legal entities, and since 2010, they have many of the same Bill of Rights protections as individuals do – at least according to the U.S. Supreme Court.
The major advantage of a corporation is that separateness. While the business may suffer, the individual cannot be held personal responsible for the company’s losses, actions, or other liabilities. On the flip side, there’s all the paperwork associated with incorporation. Just hearing or reading the term “corporation” conjures images of large rooms full of desks with people filing folders and filling out forms and delivering reports or requests up and down the hierarchy. What we see all the time in corporate environments from movies or TV shows may be a bit clichéd, but it’s not entirely unfounded.
Corporations pay taxes on their profits (assuming they make them) and again when shareholders receive dividends. This is sometimes referred to as “double taxation.” Individual shareholders are required to report profit from stocks on their personal tax returns, which brings up another feature of corporations – they can sell stock to generate capital.
Slightly under one in five NSBA members (19%) indicated their business is a corporation. This is impressively high, given that NSBA members are, by definition, “small business” owners (although that definition can be deceptive – see above) and incorporation is generally associated with larger businesses.
An S Corp is not an entirely distinct form of business organization so much as a tax structure. The name comes, in fact, from Chapter 1, Subchapter S of the Internal Revenue Code, which addresses corporate taxation.
Plus, it’s catchy. “S Corp” kinda rolls off the tongue, doesn’t it?
The central feature of an S Corp is that it allows your business to avoid that “double taxation” issue mentioned above for C Corps. The corporation does not pay corporate taxes; all profits (or losses) are passed along directly to shareholders, who include them on their personal tax returns. At the same time, ownership maintains limited liability as they would with an LLC or Corporation.
In exchange for these benefits, S Corps have limits in terms of the number of investors the law allow and the types stockholders they can have. S Corps may have no more than 100 shareholders and only one type of stock, and shareholders must be U.S. citizens or legal residents. (With corporations, investors can be virtually anyone, including other corporations or partnerships.)
S Corps are still a very popular with small businesses. One in three NSBA members (33%) reported their business includes the S Corp designation.
To summarize, if we assume the membership of the NSBA more or less reflects small business in the U.S. as a whole, roughly a third of small businesses are LLCs, another third are S Corps, and the rest are divided among corporations (19%), partnerships (2%), and sole proprietorships (12%). There are actually numerous other variations, but they’re the sort of thing you take up with your lawyer to address your very specific circumstances.
Where Is The Money Coming From?
The most recent NSBA survey found that about a third of small businesses who responded reported no need to borrow money or expend extra capital during the previous year (2017). Another third reported using revenue from the business to expand or do whatever else they needed to do, and similar numbers indicated the use of a business credit card in the mix. (Respondents could indicate more than one source of financing during the year.)
Roughly a third indicated a bank or credit union loan of some sort. 13% borrowed from friends or family, 12% received some sort of extended credit from vendors, and 3% managed to secure “Angel Investors.” There were miscellaneous variations if you’d like to read the rest of it – it’s quite interesting for a table of numbers.
By the Numbers:
That’s business success. The numbers when it comes to business failures are much more consistent. 82 percent of businesses that fail do so because of cash flow problems. That’s a big deal, my friend. That offsets a whole lot of other business loan statistics.
Why Do Entrepreneurs Take Out Business Loans?
We’ve talked before about different sorts of business loans and what requirements various business financing lenders are most likely to have. Both are worth revisiting if you’re considering a small business loan. For now, we’ll recap a few general things, then talk about where you go from here.
Most small businesses take out loans for one of four general reasons:
This one makes plenty of sense. If your business is brand new, you probably haven’t made much money with it yet. Duh.
If you use traditional lenders, you’ll most likely need to either establish a long, solid personal credit history or be able to offer up sufficient collateral, as well as provide a fully documented business plan. Online business lenders have specific requirements as well, but tend to be somewhat more flexible and eager to earn your business – although interest rates may reflect the increased risk they’re willing to take on you.
What a great problem to have. You need more space and more equipment. You need more people. Growth is great, but remember that it has to be the right growth at the right time in the right way. Work with the lender of your choice to discuss manageable debt – low enough that you’re confident about timely repayment, but high enough to finance the meaningful growth you need.
Another good problem, although this one can reflect the seasonal nature of your business as much as actual sustained growth. Maybe your business includes a retail or rental element, or maybe your service requires a ready supply of parts or equipment. Either way, flexible financing can help you meet customer needs quickly and effectively, which in turn means you keep needing more.
This can mean a range of things. From bill consolidation at the business level to ensuring the underlying structure of the business and your business plan are solid. It might also include, however, your long-term goal to have established credit down the road should you ever require substantial financing for growth, updates, or any other major need.
If you’ve started your own business, you’re clearly not afraid of hard work. You’re apparently not adverse to risk, either. It’s possible, therefore, that in previous years you’ve taken risks which haven’t worked out, despite your best efforts. Or, maybe you haven’t always been the person you are now, and your credit history reflects that. Sometimes we can do EVERYTHING right and life still hits us with unexpected expenses and challenges which impact our credit rating and our cash flow. That can make it tricky when it’s time to figure out how to finance a business.
Small Business Loans
Small business loans now, which you consistently and intentionally repay according to whatever agreement you’ve worked out with your lender, can be useful for current practical needs while helping you build or rebuild your credit – individually or as a business – towards the future.
I’ve spoken with numerous entrepreneurs whose local banks or credit unions were entirely sympathetic, but simply unwilling to work with them on a small business loan without co-signers, collateral, or other impracticality in place to protect the institution’s interest. That’s fair. They’re businesses, too, and businesses have to minimize risk in hopes of making a profit.
It’s because of circumstances like yours, however, that organizations like Loanry exist. It’s the 21st century, and we have more options than ever before when it comes to the music we choose to listen to, the way we access movies, TV shows, or other forms of episodic programming, the cell phones we buy, the electronic devices we use, the social media platforms we prefer… we can even pick and choose from potential mates through and endless array of dating apps and services.
If you wouldn’t take the very first match that comes up on DearGodPleaseDateMe.com, why would you not look at all of your options to learn which small business loans might be right for you? That would be unnecessarily careless and a tad irresponsible, don’t you think?
All Types of Business Loans
I’m not suggesting you simply Google all business loans and then take your chances with the top search result or highest-paid banner ad which appears. That would be even worse than not looking online at all, in my humble opinion. But, as it turns out, we can help in that department. (I know – what a coincidence!) See, we’ll ask you for some basic information about yourself and what you’re looking for, then connect you with verified lenders we think best match your needs.
Then, you talk to them. They talk to you. See if you hit it off. See if the vibe feels right. Maybe some magic happens and you decide to borrow and they decide to lend and a long-term relationship develops. Or maybe it doesn’t – no worries, there are plenty more out there. That’s the great thing about the freedom such a variety of lenders give you. Instead of you going around, hat in hand, trying to persuade guys in suits or tense blondes in pencil skirts that you really do have a great business idea, you become the customer. Lenders compete for your business by trying to offer you the best terms they can manage. All we do is help you connect with the right people to get started.
How Well Do Businesses Do After They’ve Borrowed All That Money?
If you’re looking for business loan statistics related to the success and failure rates of different sorts of businesses, we can only really talk about these in general terms. Like so many things related to small business or economics, the terminology and methods of measuring success or failure vary so widely from source to source that it’s difficult to speak in great detail without jumping the proverbial rails a bit. There’s also no central federal source tracking each and every small business broken down by what I’d consider the most convenient definitions. We could go state-by-state, but of course they don’t all classify things the same way.
How Rude, But We do Know Typical What Types of Companies Succeed…
Nevertheless, generally speaking, the most successful new small businesses in recent years are small-print-and-lots-of-paperwork driven:
- accounting and bookkeeping,
- payroll services, tax preparation,
- real estate lessors (owners who lease their property),
- real estate sales and services,
- various management services, etc.
A close second are those related to medical care:
- dental offices,
- medical or diagnostic laboratories, and
- range of health practitioners above and beyond traditional family medicine
Home care is particularly hot right now, presumably in part due to the rapidly growing population of those at retirement age and beyond.
Not doing as well are new oil and gas extraction companies, other petroleum parts and sales, software publishers, beverage manufacturing or wholesalers of alcoholic beverages, electronic component makers, and new grocery stores. You probably noticed one thing many of these have in common – LOTS of people are trying them in recent years. I can’t speak to the petroleum industry, but everyone knows someone who thinks they’ve written the next great app, game, business program, or extension. Everyone knows a half-dozen guys who think they’re the next Sam Adams or have home-brewed the next MmmHops.
I’m not saying you shouldn’t pursue any of these fields if one of them is your calling and your passion. That’s not my call. Just be aware that if your product or service is something many, many other people offer and think they do better than anyone else, it’s going to be a tough gig even by the standards of small business ownership.
Should I Worry?
Despite what you may have heard, most small businesses DO make it past the first year. Four out of five establishments which started in 2016 were still around in 2017. A comparable 78.6% of businesses begun since 2005 survived at least a year.
The tricky part seems to be passing the five-year mark. About half of all businesses fail before they reach this one. Making it longer than five years is by no means a guarantee of anything, but your odds improve dramatically the longer you’re in operation. It may be a steep learning curve. But if you can juggle and adapt for the first few years, your chances get better and better of being around in twenty.
Both Forbes and CB Insights have straightforward, useful pieces on why small businesses fail. I won’t dive into them here since we’re mostly focused on small business loan statistics, but I will mention one of the biggest discussed in both articles…
Lack of cash flow. Insufficient funding. Not enough money to work with in order to become self-sustaining.
Hmmm… THAT sounds like it involves business loan statistics, doesn’t it? (Hint: Yes, it does.)
Don’t let any of this scare you off. If it were easy, everyone would do it. But do go forward with your eyes open. And if there’s anything we can answer, reach out to us anytime.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.