Getting small business loans is frequently a must when it comes to building your business. In a look a t30,000 small business loan applications, Biz2Credit discovered, restaurants and other accommodation businesses, such as hotels, caterers, and the like had the highest loan approval rating. This is surprising as restaurant and other accommodation businesses tend to have lower survival rates. Why is that?
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Restaurants and other food and accommodation businesses are inherently riskier, and thus, many food businesses do not qualify for traditional bank loans. However, they can get funding via non-bank lenders, who charge higher interest rates. Remember as we said in our early posts, just because you can get a loan doesn’t mean that you should. Remember that you must believe that you can grow faster than the interest rate. Otherwise, you are losing money.
Given the low cost of capital to lenders due to the fed rate being extremely low, it is a very appealing time to alternative lenders. The spread between what it costs to acquire money is so much lower that what they can make by loaning it. SBA loan approval rates are just shy of 50%, while large bank approval rates are around 37%. These lower rates are due to higher standards, but as a result, the interest rates are much, much lower.
Technology companies lead the pack in terms of the average loan amount. Retail is next, which is likely due to the need for working capital to cover inventory purchases. The remainder are low amounts, which also make them more attractive to smaller banks and alternative lenders. This means that businesses more likely to grow are those that are seen as less risky.
Loan Approval Rates by Geography
The size of the loans varies dramatically by state. The leading states has loan amount that are nearly double that of the national average.
Technology – New Jersey
- State Avg. $251,250
- Nat’l Avg. $102,029
Retail – New York
- State Avg. $121,867
- Nat’l Avg. $73,564
Personal Services – Texas
- State Avg. $116,154
- Nat’l Avg. $52,989
Restaurant – New York
- State Avg. $106,701
- Nat’l Avg. $59,746
Business & Prof. – Massachusetts
- State Avg. $77,538
- Nat’l Avg. $43,248
Healthcare – California
- State Avg. $66,010
- Nat’l Avg. $49,835
These states are home to many immigrants and first-generation Americans, who are typically very entrepreneurial. They are also areas where the real estate markets are strong and businesses grow rapidly. Hence, loan approvals are at a rate different from elsewhere in the country.
Surprisingly, the average credit score for all the industries was below the SBA and large bank thresholds of 680 and 700 respectively, meaning that the vast majority of small businesses are challenged to find affordable rates. Credit scores, both personal and business-related, are important to maintain in order to keep a company growing at a proper rate. But in order to qualify for a loan, it sometimes takes much more work than just having good credit. Being able to pitch yourself is important, as is how you talk to banks. But it is all important in order to grow your own business.
What these data shows are that loan approval rates are improving, mostly due to the fact, the interest rates are low. As we’ve said many times in the past, being able to get a loan doesn’t mean that you should. Credit scores are still the major limiting factor to access to high quality, low-interest rate loans. If you are looking for credit and can wait a few months, then fixing your personal credit score will save you thousands in the long-run.