Business loans play a crucial role in providing entrepreneurs, startups, and established businesses with the necessary capital to achieve their goals. Here are some key points to consider regarding business loans:
CLICK HERE TO FIND OUT HOW MUCH YOU QUALIFY FOR!
1. Financing Options: Business loans can be obtained from various sources, including traditional banks, credit unions, online lenders, and alternative financing institutions. Each option may have different terms, interest rates, and eligibility criteria.
2. Growth Opportunities: Loans can support business growth initiatives such as expanding operations, launching new products or services, entering new markets, or investing in marketing and advertising campaigns.
3. Working Capital: Many businesses require working capital to manage day-to-day operations, cover operational expenses, maintain inventory levels, and manage cash flow fluctuations. A business loan can provide the necessary liquidity to meet these needs.
4. Equipment and Asset Purchases: Loans can be used to finance the purchase or lease of equipment, machinery, vehicles, or other business assets. This allows businesses to acquire essential resources without depleting their cash reserves.
5. Short-term Financial Challenges: Business loans can help companies overcome temporary financial difficulties or unexpected expenses, such as emergency repairs, unforeseen market changes, or delays in accounts receivable payments.
6. Interest Rates and Repayment Terms: The interest rates and repayment terms for business loans can vary based on factors such as the lender, loan amount, creditworthiness, and collateral. It’s crucial to evaluate these terms to determine the affordability and feasibility of the loan.
7. Eligibility Requirements: Lenders typically have specific eligibility criteria, including credit score, business history, revenue, and financial statements. Startups and entrepreneurs may face additional challenges due to limited credit history or lack of collateral.
8. Business Plan and Documentation: Lenders often require a comprehensive business plan, financial statements, cash flow projections, and other relevant documentation to assess the viability and creditworthiness of the business.
It’s important for borrowers to thoroughly research and compare different loan options, consider their specific financial needs and repayment capabilities, and carefully review the terms and conditions before committing to a business loan. Consulting with financial advisors or experts can provide valuable guidance in this process.
CLICK HERE TO FIND OUT HOW MUCH YOU QUALIFY FOR!
Small Business Financial Statistics
Small Businesses are the lifeblood of many industries and are vital to most communities throughout the U.S. In today’s economic climate an increasing percentage of Small Businesses face financial challenges, as they often operate with limited resources and face various economic and market factors. The Federal Reserve Banks’ recent Small Business Credit Survey reflects an alarming increase in credit challenges, with 59% of small businesses reported they are in fair or poor financial condition.
This statistic has jumped substantially in recent years, with 85% of small businesses experiencing financial difficulties in 2021. This number represents an increase of almost 20 percentage points since 2019 and sheds light on the very real struggles small businesses face.
Moreover, only 42% of small businesses have their financing needs met, illustrating a significant gap in financial services for these businesses.[1] The majority of them rely on either a large or small bank as their financial services provider. This heavy reliance on banks could be due to a lack of knowledge of other financing options, such as alternative lenders or angel investors.
Small Business Loan Statistics
The Federal Reserve’s latest report reflects, the average small business loan amount is approximately $663,000 and despite the availability of funds, the percentage of firms seeking traditional financing has declined in recent years.
According to the report, in 2019 approximately 43% of small businesses applied for a loan—a number that decreased to 37% in 2020. Only 34% of small businesses applied for a loan in 2021. The reason for the decline in traditional financing is unknown. The drop in applications for traditional financing over the last few years indicates that small businesses are seeking alternative financing options, such as crowdfunding, peer-to-peer lending and fintech platforms.
In 2021, only 31% of Small Businesses received all the funds they were seeking, compared to 51% in 2019. As the credit market tightened, it has become more challenging to secure traditional financing.
Reasons To Apply for a Business Loan
A recent survey by a Forbes Advisor was intended to identify how business owners used funds from their latest business loans. Respondents had the option to select up to three choices.
According to their survey, a majority of small business owners used their financing for business expansion, with 42.4% selecting this option as one of their top three choices. The second most common use of funds was Equipment purchases with 29.4% of respondents, followed by marketing and advertising at 28.6% of the loan usage.
Business franchising was the next most popular reason to seek financing, with 27.6% of respondents citing it as a factor, closely followed by commercial real estate purchases/remodeling at 26.8% and business acquisitions at 25.4%. Other common reasons included:
• Inventory purchases (24.2%)
• Cash flow for everyday operations (22.4%)
• Payroll expenses (21.8%)
• Debt consolidation/refinancing (18.6%)
The results from the Forbes Survey clearly reflect the priorities of business owners in today’s economic environment. Their survey also provides important insights for lenders and investors seeking to understand where small business owners needs are in 2023.
How Long Does It Take to Utilize Business Loan Funds? Entrepreneurs understand well that financing is one of the most important factors for their business to succeed. Equally important to obtaining financing is using the funds in a timely manner. Based on a Forbes Advisor survey, most business owners took six months or less to spend the funds from their most recent loan.[3]
Specifically, the study found that 21% of respondents took five to six months to spend the funds, while 19% took three to four months and 16% took one to two months.[3] Interestingly, only 5% of respondents said they spent their funds in less than one month.[3]
These numbers start dropping off at the seven- to eight-month mark, with only 13% of respondents exhausting their funds over this period.[3] Only 4% took over one year to spend their funds.[3]
Small Business Loan Application Data
According to Federal Reserve data, the application rates for traditional financing have continuously declined in recent years. The data shows that the percentage of small businesses seeking traditional financing fell from 43% in 2019 to 37% in 2020, with a further drop to 34% in 2021.[1] Interestingly, the few small businesses that did apply for financing were less likely to receive the funding they sought.
The percentage of applicants receiving all the funding they sought fell from 51% in 2019 to 36% in 2020, with another dip to 31% in 2021.[1] Small businesses owned by people of color, firms with fewer employees and leisure and hospitality firms were the least likely to receive the full amount of financing sought.
Recent data reveals that large and small banks are the primary sources of loans for small businesses, with 43% and 36% of companies turning to these institutions for funding, respectively. [1] However, in the last year, there has been a slight increase in the number of small businesses opting to apply for financing through online lenders.
In 2021, 23% of all small business loan applicants chose an online lender, compared to 20% in 2020. [1] Alternatively, 17% of small businesses applied for loans with finance companies, 8% with credit unions and just 3% with community development financial institutions (CDFIs).[1]
Small Business Loan Demographics
A U.S Small Business Administration (SBA) 7(a) loan is the most popular SBA loan program and includes several financing options. The SBA 7(a) program offers loans up to $5 million that business owners can use to cover everything from working capital and inventory costs to real estate purchases and construction of a new building.
According to recent SBA data, the demographic trends in 7(a) loan disbursement based on race, gender, industry and state reflect some insightful information.
SBA 7(a) Loan Approval by Race
According to the recent data, white business owners have received the largest share of 7(a) loan dollars, with 42.4% of the approved loan amount.[4] This amounts to just under $10.9 million in total loan funds. Those who didn’t specify their race received 25.2% of the loan amount, just under $6.5 million.[4] Following them are Asian business owners, who received 20.6% of the loan dollars, with slightly more than $5.3 million in loan funds.[4]
Hispanic, Black or African American and American Indian or Alaska Native business owners received the smallest share of total 7(a) loan dollars at 7.2%, 3.9% and 0.7%, respectively. 4] This data reflects the critical need for increased equity and inclusivity in the lending industry.
SBA Loan Approval by Gender
Based on the SBA data, male-owned businesses have received a majority of the loan dollars, with 71.6% of loan approval amounts, totaling almost $18.4 million.[4]
Companies that are more than 50% female-owned receive just 14.8% of these funds, equating to just over $3.8 million.[4] Businesses that are less than 50% female-owned receive a similar amount—13.6% of loan funds totaling almost $3.5 million.[4]
These numbers demonstrate an apparent discrepancy in loan distribution and draw attention to gender inequalities within the business world.
SBA Loan Approval by Industry
In 2022, the largest share of 7(a) loan dollars went to businesses in the accommodation and food services industry (19.20%), followed by retail trade (14%), and healthcare and social assistance (10.30%).[4] These industries demonstrated the highest demand for financial assistance in the small business sector.
The public administration, utilities and management of companies and enterprises sectors demonstrated the lowest share of loan dollars, representing 0%, 0.10% and 0.20%, respectively.[4] Interestingly, while the management of companies and enterprises sector had a relatively low percentage of loans and loan dollars, it claimed the highest average loan size, hovering around $1.4 million.[4]
These statistics illustrate the importance of specialized financing programs customized to meet each industries specific financing needs. With the help of targeted loan programs like 7(a), small businesses may be able to obtain the necessary funds to accomplish their goals.
Disclosures
• Federal Reserve: 2022 Report on Employer Firms / 2021 Small Business Credit Survey
• Federal Reserve: Survey of Terms of Business Lending
• Forbes Advisor: April 2023 Business Loan Survey
• U.S. Small Business Administration: 7(a) & 504 Summary Report