If you’re looking to grow your business operations in 2019, you’re not alone. Small businesses frequently earmark Q1 of the new year to launch new initiatives, hire additional employees, and expand into new markets. Of course, all of that takes funding, and not any old line of credit will do. Business owners tend to be an innovative bunch, spreading their financing loyalties around to credit card issues, micro-lenders, traditional banks, and even their peers. So, which type of lending leads to the highest rate of satisfaction? The answer may surprise you.
What Businesses Turn to for Financing
The stats show that businesses owners have some go-to favorites for loans, and they may not be what you think. The trends vary by demographic, including age, gender, and nationality. This SBA report breaks it down in a detailed way, but some things really stick out:
Overall, small business lending increased in 2018, largely due to traditional and large institution funding, such as traditional banks. Fixed rate borrowing (such as short-term loans) was slightly more popular than variable rate (such as credit cards and lines of credit.)
Additionally, the Federal Reserve reports:
“Application approval rates varied from 81 percent at small institutions to 51 percent at large institutions during the third quarter. Compared with the second quarter, approval rates were higher for large and midsized banks, but lower for small banks.”
So, businesses can reasonably assume that a smaller bank is more likely to say “no” to a traditional loan. They perhaps can’t afford to take on the risk that a larger bank can. Interestingly, the most common reason for denying an application for a traditional was financial stability of the applicant, along with a lack of credit history.
But traditional loans aren’t always the popular choice. Credit cards, microloans, and even P2P loans are increasing in favor, especially among startups and those without the big revenue numbers and solid history mentioned above. The order of business funding, by most popular, is:
- Small business loans
- Non-bank lending
- Mezzanine and buyouts
- Venture capital
- Angel investing
Additionally, credit cards are more popular for expansion capital (making up 5 percent of funding) but are rarely used in startups. Where a business is at in its life cycle influences, the type of funding pursued.
Utilization Doesn’t Always Mean Satisfaction
While there some clear winners in those numbers, that’s doesn’t imply that everyone is happy with their choice. Some businesses may gravitate toward credit cards, for example, because that’s all they can qualify for under current lending requirements. Others choose to borrow from family and friends due to a lack of credit history. Still, others pick microloans as their only options for startups with no proven revenue trends. Don’t assume that the lending vehicle most common for your business type is always going to be your clear favorite. What works for other businesses isn’t always the best choice for you.
Personalized Lending Is Best
It seems cliché to say that the superior lending product is the one that works best for your unique business needs, but it’s an accurate statement. Directing all small businesses to SBA loans, for example, because of their stellar reputation and opportunities for large loan amounts is short-sighted. Not every small business qualifies, and still others don’t need access to that much capital. Likewise, insisting that company founders get the most satisfaction from credit cards is an incorrect generalization. The flexible, unsecured credit lines they offer are perfect for short-term spending but can introduce businesses to high-interest rates and inflexible repayment terms.
So, how can business owners find themselves truly happy with their choice of lenders? What’s the first step to take in making that perfect match? Start by asking some important questions:
- How much money do I truly need? Small projects are easier to fund and don’t need the massive loan amounts of a traditional lender, so it may not make sense to apply for more than you need. On the other hand, if you have ongoing project needs and would like to tap higher credit limits, this will direct your search and narrow down your choices.
- How much money can I afford to borrow? You may qualify for a large loan, but is it wise? Business liquidity, sales projections, and any limits you may have in place by existing loans can keep you from fulfilling your borrowing terms. If a bank pre-approves you for a large loan amount, it’s not always best to take them up on it. Practice careful planning when deciding if a loan is for you.
- What will it cost to borrow? High-interest rates, arbitrary fees, or penalties can all factor into the final price of your business. Know what the loan will really cost when it’s all paid up and if you’re going to feel good about it when it’s said and done.
- Will I have to sacrifice personal assets? Secured business loans are the norm, but if you’re scared about losing your home or don’t feel comfortable with collateral terms, a loan may not be for you. It’s hard to enjoy a loan when you’re worried about the consequences.
One final factor to consider is how quickly you need the money. While it’s very simple to apply for credit cards and many small business loans online, government-backed loans and those issued in conjunction with the SBA can take weeks of preparing paperwork and going through a somewhat lengthy process. If you need cash fast, you’ll want to use a resource like Nav to sort through your options and aim to apply for those that pre-approve, process your application, and disburse funds within a few business days.
If you’ve applied for loans in the past and have not been happy with the outcome, you can take solace in the fact that business lending is a quickly changing landscape. New financing options become available all the time, and the lending process seems to get less complicated as technology advances and market competition factors work to attract new borrowers. The right funding option is out there, or will be soon.
This article was originally written on December 24, 2018 and updated on December 10, 2020.