While minority and women business owners are eligible for a number of lending programs aimed specifically at MWBEs, many firms continue to turn to traditional lending sources when they need working capital or wish to expand. So, as we move towards Q3 of fiscal year 2019, we decided to offer our readers an overview of the state small business lending using data from Fundera gathered between Jan. 1 and March 31, 2019.
Overall Small Business Lending Trends
Small businesses received an average of just over $46,000 in funding from traditional lending sources in Q1, most of it (60 percent) for working capital. About 15 percent of businesses received funding for expansion, and 10 percent sought funds to purchase new equipment. The other 15 percent of loans were for debt refinancing, marketing and advertising costs.
The average annual revenue of firms that secured funding was under $1 million ($878,000) and their average reported profit was $135,617. The business owners’ personal credit scores averaged 663, while their Equifax business credit scores were in the 430 range. Additionally, most of the firms were well-established, with an average lifespan of about 7.5 years and an average of 6.6 employees.
Industry Lending Trends
On a positive note, a mix of service providers and product manufacturers were among the top 10 industries to receive funding. They were (in descending order):
- Electronics manufacturers
- Building materials and home furnishing firms
- Specialized retailers
- Strategic and general consultants
- Creative and marketing firms
- General home services,
- General health services
- Construction and material firms
- Gyms and fitness clubs
- Software developers
Key Factors in Qualifying for a Loan
Fundera analyzed several factors when looking at the types of businesses that secured funding in Q1 2019. Of those, the three that played the biggest part in obtaining a loan were annual revenue, personal and business credit scores, and the length of the requested loan (short-term versus long-term financing.)
Annual Revenue Versus Profits
Most businesses that secured funding had substantially higher revenues that the average, according to Fundera’s loan data. Eight out of 10 industries with the highest rates of loan approvals had revenues above the average of $878,078. Profits, on the other hand, were far less important. In fact, 90 percent of businesses in the top 10 industries reported annual profits below the average of $135,000.
Why is this the case? As a rule, lenders want to know that a business has a sufficient income stream to meet its obligation to pay back the loan. They are less concerned with profits, since that has far less of an impact on whether a company can repay its debts. Lenders that do consider profits, such as banks and SBA lenders, tend to look at whether or not the business is profitable rather than how much profit it makes.
Lenders always look at credit scores. But in small business lending, the business owner’s personal credit score generally is as much if not more of a factor than the business’ credit score. As a rule, small business lenders tend to look for a FICO credit score of 670 to 750 or above (the max is 850.) However, short-term lenders often accept a lower score (hence the average score of all approved small businesses of 663.)
Business credit is also important, and firms in six of the 10 highest ranking industries had Equifax business credit scores above the average of 429 (Equifax business scores range from 101 to 660, so 429 is already in the upper range.) Be aware, too, that there are a number of companies that rank business credit, so it may be worthwhile to ask which one the lender you choose employs.
Length of Loan Requested
As a rule, lenders are less stringent in qualifying small businesses for short term versus long term loans. That’s one reason why the majority of loans approved during the first quarter of the year were for operating expenses, which tend to have much shorter repayment terms. Since many small businesses fail, lenders are typically willing to lend a business money for a couple of months if it has an income stream to support repayment over that period of time. Since long-term revenue is less predictable, lenders are less likely to approve loan terms of three or more years.
If you’d like a more complete account of the industries that were included in Fundera’s data,visit this page for the full report.
The Carmoon Group, Ltd. is a minority owned family business headquartered in Hicksville, New York. Through our large nationwide network of affiliates, we offer risk management solutions to businesses of all sizes all across the United States. Give us a call today to schedule an appointment for your insurance review. Or, if you prefer, just reach out online and we will get back to you at a convenient time.