Top Reasons An SBA Loan is a Great Way to Fund a Company

The Small Business Administration works with financial institutions and specialized lenders to offer business loans. These loans are typically easier to qualify for. At least compared to traditional business financing. And you can use them for many aspects of your business. The amount of time you have to pay back these loans depends on the purchases that you make. Working capital is tied to a seven-year repayment term. You can pay back equipment purchases over 10 years, and real estate has up to a 25-year repayment term. In most cases, you can use this funding for practically any expense that has to do with your business. And it’s especially good for gathering the resources for rolling out new locations, equipment, and other improvements in operations.

A Quick Summary of SBA Loans Types

Before we get into why you should choose an SBA loan to fund your company, let’s take a quick look at the various types of SBA loans. It’s extremely important that you are familiar with them. This is the only way you can actually choose the right type for you. And also figure out all the benefits that come with the right SBA loan.

7(a) SBA Loans

SBA loans come in several forms. The 7(a) is the one that typically comes to mind when someone refers to this loan program. The 7(a) loan is intended for working capital, as well as business expansion and major equipment expenses. You can borrow up to $5 million under this program.

CDC/504

Your company needs to purchase real estate, buildings, or machinery. And you don’t have a need for other types of working capital. Then the CDC/504 loan may be the better option than the 7(a). It has a higher maximum of $25 million. This provides more flexibility on getting the high-cost real estate and equipment needed to invest in your company’s success.

Microloans

Typically, these loans are issued through nonprofit organizations and specialty lenders, rather than your typical bank or credit union. This program is geared towards very small businesses and those at the beginning stages. Much like the 7(a) loans, you can use microloans as a source for working capital. The maximum loan available under this program is $50,000.

Disaster Loans

It’s very easy for unexpected disasters to ruin a small business and cause it to become bankrupt. The SBA offers assistance during these situations. The aim is to help companies avoid going out of business. This loan program provides funding for needs that arise during an emergency. Typically, the SBA handles these loans directly.

Do SBA loans require a personal guarantee?

The SBA requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.

Reasons to Get a Loan for Your Business

Secure working capital:

One of the primary reasons that small businesses get loans is to secure working capital for their companies. When you have more working capital available, you can make investments and purchases that lead to a higher revenue stream over time. You’re setting up a foundation for long-term gain. Doing so by financing these purchases. As the upfront cost may be significantly more than your small business can cover from its current cash flow. Either it is for real estate, equipment, inventory, technology, or other expenses.

Expand new locations:

Another reason to get a loan for your business is to expand to new locations. If you’re doing great at your current venue, but you want to expand, then a loan will give you the funding you need. It will allow you to establish your business in the new market until the revenue starts flowing for that location.

Small business loans help these companies compete against larger organizations, which already have substantial resources available to fund their operations. You may want to use the money to bring in new employees, invest in time-saving software, or fund product development.

A healthy mix of small business financing combined with your current and projected cash flow is a valuable resource for steadily and sustainably growing your company. You don’t have to pass up profit-generating opportunities because of a lack of capital when you have access to this type of funding loan.

Give you more options:

Ultimately, a loan gives you more options. That is excellent for a savvy business owner that knows the company isn’t living up to its full potential yet. In the long run, it helps the company’s health that there is another funding source outside of investors and the existing cash flow. This diversity means that if something happens with one of the other sources, it creates a lower risk of the company going into bankruptcy.

List of major benefits of an SBA loanMajor Benefits of an SBA Loan

SBA loans have many benefits that they bring to small businesses. Here are a few reasons to consider applying for an SBA loan.

Low Interest Rate Compared to Other Business Loan Options

Commercial loan rates can be significantly higher than what you’re used to with consumer rates. This can make it difficult to get the necessary financing to establish or grow your business. An SBA loan has significantly lower rates, with many in the single digits. The exact rate depends on the type of loan that you’re getting, as well as the repayment terms and your company’s creditworthiness.

Multiple Types of Loan Options

There are three primary categories of SBA loans: 7(a), microloans, and CDC/504. Each has a specific financing use that they cover, which allows businesses to choose the one that makes the most sense for their needs. In most cases, the 7(a) ends up being the loan option that covers most typical business use cases, while microloans are suitable for smaller businesses, and CDC/504 are intended for large fixed asset purchases.

Both Established and New Businesses Benefit

Businesses of all sizes can take advantage of the opportunities that SBA loans provide. Through this program, you have access to more resources when you’re first starting out or as part of your ongoing expansion. This flexibility makes it accessible to more business owners and allows for people to realize their vision for their companies.

Government Backed

One of the biggest advantages of the SBA program is that the loans are federally backed by this agency. They guarantee the loans up to 85 percent of their value, reducing the risk for banks and other financial institutions that participate in this program. The biggest impact to businesses is that companies that wouldn’t normally be able to access financing, are willing to reduce their qualification criteria because they have less concerns if someone defaults on their SBA loan.

Relatively Low Qualification Requirements

Many commercial loan qualification requirements can be onerous, requiring extensive time in the industry, large cash flows, significant assets, well-established business credit lines, and countless other factors. The SBA loans have lower requirements, both on the business side and the personal guarantee side of things, which make it much easier to qualify for these products. It can be difficult to become a great loan applicant on paper when you need to expand your business so you can show its true potential, which makes SBA loan options particularly useful in this kind of situation. The three primary factors they look at are credit scores (both business and personal), how long you’ve been in business, and your cash flow.

It’s Often the Only Loan Option for Many Businesses

Since the SBA loan offers lenders more flexibility in their selection criteria, it’s frequently the only option available for business owners who have limited experience with business credit, or who have poor personal credit. After businesses get denied financing through other channels, they can turn to the SBA as a source for the funds they need to invest in their operations.

Long Loan Repayment Terms

Depending on the type of SBA loan you take up, you could have up to 25 years to repay it. Your payments are also billed on a monthly basis, rather than a shorter schedule. The typical SBA loan has at least a 7-year repayment term, which provides plenty of time to make payments while your business begins expanding thanks to the influx of capital.

Support Through Educational Resources

Many business owners looking at SBA loans are relatively new to running a company. There are many factors that go into the success or failure of a company, and the SBA has a vested interest in helping you succeed. The educational resources available on the SBA site and through the agency’s partners help you learn from your mistakes, avoid other issues, and set your company on the path to long-term growth.

Gain Mentorships

Another way the SBA helps you succeed is through connecting you with mentorships. An experienced mentor can be a significant asset as you face business challenges during your growth. Being able to get input from your mentor can make a world of difference in the way that you set up your business goals and move forward.

Preparing for the SBA Loan Application Process

If a SBA loan is right for your business, then it’s time to start preparing for the application process. The first thing to do is look at your personal credit. As part of the SBA application, if you have a 20 percent or more ownership interest in the company, you’ll need to put a personal guarantee on the application.

Having strong personal credit can help reduce your rates on this loan product. Although there are many other factors that also go into the APR that you’re given. Your business credit is also considered. So it’s important to build up that type of credit through business credit cards, lines of credit, and charge accounts with your vendors and suppliers.

Gather documentation such as your business plan, profit and loss statement, business debt schedule, bank account statements, asset documentation, cash flow projections, and other information that shows the financial health of your organization. You want to show the SBA lender that you have an established business that has a strong plan for future growth. The SBA helpfully includes a complete checklist of documents that you’ll put together as part of your application.

Choosing an SBA Lender

For most SBA loan products, you’ll deal with a bank or credit union as your SBA lender. Some specialty lenders and nonprofit organizations are also involved in the process. And the SBA works with loans directly for disaster funding. You can check a business loan shop to compare your rate options among banks and other lenders.

Experience Matters

The most important aspect of your potential lender to look for is how much experience they have with issuing SBA loans. If the SBA program is a small part of their overall lending business, then they may not have the expertise required to give you the best option that’s available to your business. If possible, reach out to other business owners in your market or your location. See which lender they prefer, and their overall experience.

When you interact with the lender, are they readily available? Is it difficult to use their online services or is everything laid out in a straightforward and easy to navigate fashion? Do they answer your questions in full and have a good reputation in your community? Are there lenders that come up again and again in your industry as great choices to work with?

Consider all of these factors when you begin evaluating the financial institutions for your business. You don’t want to pay more in interest rates than is necessary, nor would you want to miss out on important lending opportunities simply because the bank doesn’t have enough of an understanding of the SBA loan program.

The SBA loan application process, from start to finish, may take several months. It depends on the state of your business and personal finances. Your industry, the length that you’ve been in business, the lender’s familiarity with these programs, and other factors. While it may be frustrating at first to wait, that patience is rewarded through generous loan limits and low interest rates.

Reasons Why Your Application May Be Rejected

Rejection can be difficult to deal with. Especially if you’ve applied through other lenders before approaching the SBA program and you got denied. However, each denial will give you useful information to better prepare for the next application. And you will learn ways to position your company to get the investment loans that you need to fuel your growth.

Not established enough

Outside of the microloan program, you need to have a well-established business before the SBA lender will feel comfortable issuing a loan to you. The exact definition of “well-established” will vary between each financial institution. But they will generally want to see several years in business with an overall positive flow of revenue. If a microloan is too small for your needs, you may need to wait another year or two before you try to apply for the loan again.

Poor personal or business credit

Bad credit on either the personal or business side of the equation can lead to denials. The bank may not feel confident that you’ll be able to pay the loan back as agreed. While you can get around poor personal credit by not providing a personal guarantee, you won’t be able to do the same thing if you are not paying your business credit accounts on time.

SBA loans don’t cover your industry

Some industries are excluded from coverage by SBA loans. So you would not be eligible for this program at all. The denial would detail this information so that you aren’t wasting time trying to apply for a loan that wouldn’t be available to you.

You don’t have enough collateral to make the bank feel comfortable issuing the loan

The maximum percentage that the SBA guarantees for their loans is 85 percent. When you have a larger loan, that 15+ percent can represent a significant amount of money for the bank to put on the line. In these cases, you’ll need to offer up collateral so that the bank covers their risk to an acceptable level when issuing the loan. The exact type of collateral depends on the lender that you’re working with and the loan that you need covered.

You want to maintain a divide between your business and personal assets

Refusing to give a personal guarantee frequently leads to denials. Even if you’re only doing it to stop your personal and business finances from mingling together. You may need to look at loan options outside of the SBA loan program to secure financing for your company.

Final Thoughts

The SBA loan program is a valuable resource for small businesses looking to expand their operations. And to secure funding to invest back into their business. Lenders working with the SBA are able to offer a variety of loan products that have more relaxed credit requirements than other commercial loans. And there are many benefits for companies deciding to go this route. If you can qualify for an SBA loan, you can really benefit from one. If not, there are other small business funding options out there.

There are other options other than SBA loans to consider. You can find all about them in our finance education section. We have dozens of blogs on the topic of business loans and there is not a piece of information we left out. If you decide on another option for you, for example online lenders, Loanry has your back as well. We can connect you to reputable lenders and make the process of getting a loan a bit quicker and easier for you.

Startup Loan Built for The Confident Entrepreneur

Any business venture requires upfront funds to get anywhere. Entrepreneurs can’t start a company without some upfront capital. Fortunately, there are many options that entrepreneurs can explore when they’re searching for the source of funds for business they need. The important thing is to do research and fully understand what the motives are behind getting a startup loan. It’s also essential to understand how you can use such a loan best to lead a company to success.

Another important thing that you need to consider is the type of loan that you as an entrepreneur are going to pursue. It’s important to understand the many options out there and you can actually use many types of loans to finance startup ventures.

The following are some important information to keep in mind if you’re an entrepreneur considering a startup loan.

Startup Loans – What You Need to Know

An entrepreneur needs to have good reasons to pursue a startup loan. Entrepreneurs must remember that taking out a loan means that their fledgling company will have a new expense to cover each and every month. This puts an added budget on the company budget. It’s therefore essential that borrowing is justified for the company.

The justification for a loan should include a detailed explanation of what you will spend the loan funds on. This is important not only for the company itself to make the right financial decisions, but also for securing the loan. A lot of financial institutions have strict requirements regarding business plans for use of the loan that must be met before a company will be approved to borrow.

Business owners should be very detailed in their planning measures. The exact expenses that the loan will be used for should be determined. Also, business owners should develop financial projections explaining how loan payments will be worked into the company’s budget into the future. Before even looking for a loan, business owners should determine how much they need to borrow, how long they want to have to repay the loan, and how much they will pay in interest throughout the loan life.

Possible Reasons for a Startup Loan

There are numerous reasons why entrepreneurs want or need to borrow when they’re just starting out with their business ventures. The following are a few of the most common reasons why loan funds are necessary for startup ventures.

Paying Living Expenses before Profits Start

One of the biggest expenses a lot of entrepreneurs need to deal with when they’re startup up a new company is their living expenses. Profits aren’t going to come in for a new company right away. In fact, it can take weeks or months before profits start coming in for a lot of different business venture types out there.

Loan funds can make it possible for entrepreneurs to devote their full efforts to their new company. Instead of juggling a job and a startup, they focus only on their startup. This increases their chances of startup success. It also increases the speed with which their startup venture becomes profitable.

Acquiring Needed Equipment

Every startup venture requires some type of equipment. For example, a construction business requires tools and vehicles for transportation. An advertising startup requires computer and printing equipment. The equipment a startup requires to get started can be one of the most significant expenses.

Startup loans are a good option for making large equipment purchases. Entrepreneurs might not have enough money to purchase these items. At the same time, the profits won’t come in and the business won’t grow until equipment is required.

While renting equipment is an option for many equipment types, even rental equipment costs add up over time. Equipment loans for startup ventures help manage these expenses.

Hiring Staff

Many startup ventures require staff. Entrepreneurs might not be able to take on the jobs and assignments they need to alone. They need to hire laborers to assist them. Wages for laborers are expensive. Also, there are expenses in addition to wages that go along with hiring help. Entrepreneurs are often required to cover additional expenses like unemployment insurance costs if they hire employees. Loan funds for startups are often used to pay for expenses like these.

Types of Startup Loan Available from Business Loan Companies

After you decide to borrow, your job is far from over when it comes to acquiring a loan. The next step is to evaluate all the loans available to you. You need to look carefully into various business loan companies. There are numerous types of loans one can use for startup funding. You’ll make the best choice on which loan to borrow by researching. It’s important to know what all the options are to make the best possible decision.

Here are some of the most common loan types that you can use for your startup.

Basic Startup Loan

Some financial institutions out there might offer loans that are specifically designated as startup loans. New companies are the ones who should look into these loans. They might be specifically designed for companies that don’t have a great deal of credit history. For these reasons, they may have higher interest rates.

The approval decision for these loans could be based mostly on persuading the lender that the venture is profitable. However, lenders might also offer these loans on the basis of collateral. This would make them secured loans rather than unsecured loans.

Convincing a lender to provide a startup loan typically requires a lot of work and documentation. The lender will want to see a detailed business plan. They will want a thorough analysis of the market. They will want to know why customers will prefer you over the competition. You need to be prepared when you apply for a startup loan. The lender’s approval decision will be based on how prepared and convincing you are.

Term Loans

Term loans are generally unsecured loans. A term loan refers to any loan type that is designed so that repayment is made at regular intervals. When an individual takes out a term loan, they get the entire loan amount upfront. Then, they begin making payments. They repay the loan until it is paid off in full.

The approval decision for term loans is generally made according to the business and credit of the startup. For a new company, it’s basically always necessary to use one’s personal credit history to be approved. This means that entrepreneurs usually need good personal credit histories to be approved for term loans.

Small Business Administration Loans

Small business administration (SBA) loans are loans that you can get through the government. These loans are one of the government’s efforts to encourage entrepreneurship. They have the advantage of lower interest rates and somewhat easier approval for fledgling businesses.

Any entrepreneur should definitely at least look into the possibility of taking out an SBA loan. SBA loans are backed by the government. Lenders are more likely to approve borrowers for SBA-backed loans because they involve less risk for the lender.

Nevertheless, there are numerous requirements entrepreneurs must meet to get the loan. SBA loans are good for entrepreneurs who can meet the requirements and face higher interest rates with private loans.

Secured Loans

Secured loans are often the only option for entrepreneurs who don’t have strong credit. Taking out a secured loan involves offering collateral to the lender. The lender takes ownership of the collateral if the entrepreneur is unable to pay back the loan.

Entrepreneurs can use just about any valuable possession as collateral for these loans. One common piece of collateral is a vehicle. Entrepreneurs can put up their vehicle as collateral through what’s known as a title loan. The entrepreneur gets continued usage of the vehicle unless he or she defaults. At the same time, the entrepreneur is able to use loan funds for their business. People also frequently use real estate properties as loan collateral.

Another type of secured business loan is a vehicle or equipment loan. An entrepreneur can borrow money to purchase a vehicle or equipment. Then, the entrepreneur uses that vehicle or equipment as collateral while paying back the loan. These are great options for acquiring equipment without strong business credit.

Credit Lines

A credit line or revolving credit is a great option as a startup loan for entrepreneurs. Credit lines are convenient because they make funds available to entrepreneurs. At the same time, entrepreneurs don’t necessarily have to spend these funds. For this reason, business lines of credit serve as a good emergency fund. Entrepreneurs can use their credit account if they’re dealing with an unexpected decrease in cash flow.

Most entrepreneurs will eventually open up a line of credit for their business. In fact, statistics show that 41 percent of small businesses have a line of credit open. Most major financial institutions offer business credit cards. They not only create more funds for companies, but also make purchasing supplies more convenient.

If you’re in need of equipment, you should look into lines of credit available from suppliers. A lot of equipment suppliers offer lines of credit to business owners. It’s often easier to get approved for a business line of credit from a supplier than from a financial institution.


Personal Loans

Personal loans are important for funding a lot of entrepreneurial ventures. Entrepreneurs building startups don’t yet have strong business credit. They, therefore, must rely on their personal credit to borrow. As an entrepreneur, you’re at a huge advantage if you have strong personal credit. However, entrepreneurs can use both their personal credit and their business plan to achieve approval from lenders.

One does not necessarily use personal loans as business loans. However, a personal loan generally consists of funds the borrower can use on anything. So you can actually use them for business expenses if that is what you need.

Sole Proprietorships Businesses

Personal loans used for business purposes are especially common with sole proprietorships. Entrepreneurs running sole proprietorships aren’t really separate entities from their businesses. Their credit is their company’s credit and vice versa.

The only real drawback to using a personal loan for business purposes is the potential negative consequences. If anything goes wrong, it can ruin an entrepreneur’s strong personal credit. This makes it especially important to make all payments on time and pay a personal loan off in full. Even missing a single payment could cause a ding in an entrepreneur’s personal credit.

If you’re an entrepreneur looking for financing, analyze your credit report to determine if a personal loan is your best chance for funding your business venture.

Signs You Should Borrow a Startup Loan

While loans are obviously important for startups, it’s important that an entrepreneur takes care before borrowing. One of the challenges in the early days for a startup is having enough cash flow to cover expenses. Borrowing money for a startup provides necessary initial funds. However, it also creates an added expense each month during the repayment period. Borrowing costs money in interest.

Entrepreneurs should evaluate the situation carefully and crunch the numbers before borrowing. They should avoid borrowing if they have no clear idea of what they’re going to spend funds on. And they should avoid borrowing if they’re only eligible for loans with high interest rates. They should also avoid borrowing if they’re not sure when their business will start to bring in money.

As an entrepreneur, you should avoid borrowing in many scenarios unless the following situations are present.

You Can’t Proceed without Capital

Entrepreneurs should limit startup loan borrowing to situations when it’s absolutely necessary. There should be an opportunity they want to pursue that they can’t pursue without loan funds. Managing funds is an essential skill for a successful entrepreneur. Entrepreneurs need to know how to best direct their liquid assets. They also need to know how to weigh the costs of borrowing versus the added profits borrowing can bring.

As an entrepreneur, you should be aware of alternatives to borrowing if there are any. You should calculate the added profits you can enjoy by borrowing. Then, you should compare this to the costs of borrowing. Only borrow if the venture will be profitable and won’t leave you in the red.

You’re Ahead with All Your Current Expenses

Entrepreneurs definitely shouldn’t borrow when they’re already struggling to keep up with their company’s expenses. As previously mentioned, borrowing leads to an added cost for a company. If your startup’s finances are already stressed, borrowing will make the situation worse.

Falling behind on loan repayment downgrades a company’s credit rating. If an entrepreneur backs their startup loan with their personal credit, then their personal credit will also be downgraded. Entrepreneurs must tread carefully and analyze their startup finances in detail before committing to a loan.

But if you are managing to pay your current expenses and you’re not already in debt, then you can consider a startup loan if there is a need for additional funds.

You Have a Guaranteed Opportunity to Profit

As an entrepreneur, you might argue that nothing is guaranteed in the world of business. It’s true that you can’t be 100 percent certain of profiting from a venture. However, some ventures clearly show more potential than others. It’s best to avoid borrowing unless you see an opportunity showing a lot of potential.

The venture you invest your loan funds in may turn out to be a flop. Even so, you’ll still be on the hook for paying back the loan. Do your due diligence and limit borrowing to ventures you have a great deal of confidence in.

Final Thoughts

The inability to acquire a funding loan is frequently the biggest obstacle to success as an entrepreneur. The more you know about resources for getting a startup loan, the faster you’ll be able to start. Calculate all the expenses you need to cover to realize your business vision. This will tell you how much you need to borrow. Of course, it’s good to minimize your startup expenses. You’ll want to have as little debt as possible to maximize your chances of business success. Bring down startup expenses through innovation and creativity. Buy used equipment or run your business out of home rather than a commercial facility, for example. There are always ways to bring down costs if you do your research.

The Internet is a great resource for entrepreneurs looking for a startup loan. Most financial institutions offer information about business loan products on their websites. Using the Internet, you have information on many loan opportunities at your fingertips. Also, many lenders offer great tools on their websites like loan calculators. With resources on the web, you start today. Use the resources at your disposal and you may be surprised at how easy it is to finance your entrepreneurial dreams.

 

Small Business Loan Statistical Overview: By the Numbers

According to the U.S. Small Business Administration (SBA), a small business is a business with fewer than 500 employees. Well, sort of. Most of the time. Maybe, under certain circumstances.

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.

An Example

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.

Dollar-based Industries

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.

Small Business Loan Statistics: 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.

Business Loans

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.

Small Business Loan Statistics: 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.

Sole Proprietorship

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.

Partnership

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)Corporate Structure 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

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.

S Corps

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.

Small Business Loan Statistics: What Types of Businesses Are People Starting With These Loans, For Real?

There are almost as many types of small business as there are businesses themselves, but we’ll hit a few generalities just to give us some context. Keep in mind, however, that as with any statistic or trend, while you should certainly consider these sorts of things when deciding your own course of action, they should never dictate your final choices.

Seriously, if you were going to always play it safe and follow the most statistically likely path to success, you wouldn’t even be running your own business, would you?

If you’re wondering what sorts of businesses people are starting from scratch, sometimes based in their homes or even their cars, there are a variety of interesting lists and colorful summaries to choose from.

Small Business Trends and Business.org each have interesting takes on what they believe to be the “most successful” small business ideas as well.

Small Business Loan Statistics: 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.

Small 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:

One, they’re trying to start a business.

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.

Two, they’re trying to expand their business.

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.

Three, they need more inventory.

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.

Four, they’re looking to strengthen their financial foundation.

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.

Understanding the Different Types of Business Loans

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.

Business Loan Statistics: 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 a 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.

Maybe you should be a dentist instead? (I’m mostly kidding on that part. But only mostly.) The point is, I can help you with business information and business loan statistics, but only you can make the final decision how to proceed.

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.

In case you’re curious I’ve written similar pieces about statistics for other loans types:

Auto Loan Statistical Overview: By the Numbers

Personal Loan Statistical Overview: By The Numbers

Thank you for reading. Please comment if you have questions. I’d be happy to answer. We’re always around.