Navigating your small business financing options can be a daunting task. What types of funding might you qualify for, and what should you look for in a financing product? How are other companies like yours financing their startups, operations, and growth?
Browse this collection of up-to-date small business financing facts to get to know the landscape. From traditional lending with the big banks to creative alternative financing solutions like peer-to-peer lending and invoice funding, there’s a world of opportunity out there for motivated entrepreneurs to discover.
Who needs small business financing?
- Independent business owners without a four-year degree now outnumber those with a bachelor’s degree or higher, according to the CNBC/SurveyMonkey Small Business Survey. One-quarter of respondents had up to a high school diploma, and adding in those with associate’s degrees or with some college brought the figure up to 56%.
- Two-thirds of SMB owners and leaders (66%) are personally responsible for three or more of the following areas of their business: operations, finance, sales, marketing, human resources, customer service, product development, or IT (Salesforce).
- Small businesses represent 98% of the total number of employer businesses in Canada, and approximately 71% of total private sector employment. Further, Canadian small businesses from the private sector accounted for approximately 30% of the gross domestic product of the total economy (Government of Canada).
- In 2014, according to U.S. Census Bureau data, there were 5.83 million employer firms in the United States. Firms with fewer than 500 workers accounted for 99.7% of those businesses, and those with less than 20 workers made up 89.4% of businesses.
- Globally, micro and small enterprises (defined as those with one to 49 employees) and “medium” businesses (defined as those with 50 to 249 employees) account for half of global GDP and two-thirds of all jobs worldwide. Many are financially underserved, and an estimated 200 million businesses worldwide need financing to invest, grow and create new jobs (SME Finance Forum).
- Startup firms are twice as likely (43% compared to 22%) as mature firms to be growing firms by adding jobs and growing revenues, according to the Federal Reserve Bank of New York’s Small Business Credit Survey.
Where does small business financing come from?
- Statscan reports that more than 80% of Canadian startups rely on alternative funding sources such as the entrepreneurs’ savings and personal loans taken out by owners. Only 45% can access credit from financial institutions and 19% receive trade credit from suppliers (The Globe and Mail).
- According to the National Small Business Association, 69% of small businesses used financing in 2016, including loans, credit cards, venture capital, and crowdfunding. The remaining 31% were not able to obtain adequate financing.
- Small and medium-sized enterprises (SMEs) are increasingly turning to alternative sources of financing, while new bank lending is declining in a number of countries, according to the OECD. New bank lending to SMEs fell in 15 out of 25 countries for which data was available in 2016, and the median value growth rate in new SME lending fell from 2.6% in 2015 to -5.6%.
- A rise in venture capital investments and private debt to SMEs occurred in most OECD countries in 2016, along with rapid growth in peer-to-peer lending, equity crowdfunding, and invoice trading. The use of online alternative finance was especially high in China, the United Kingdom, and the United States (OECD).
- Leasing, hire-purchase activities, factoring, and invoice discounting, which are based on asset value rather than credit standing, rose for a second consecutive year (OECD).
- Almost half (46%) of startup applicants are dissatisfied with banks due to the long wait for a credit decision (Federal Reserve Bank of New York).
Why does small business financing matter?
- A global gap of over $5 trillion USD exists between the financing needs of micro, small, and medium-sized enterprises and the institution-based financing available to them (SME Finance Forum).
- In 2017, the top challenge business owners faced was a lack of capital, followed by marketing and advertising efforts, and the recruiting and retention of employees. Despite access to capital being an issue, 65% of business owners said they were looking to grow their current location (State of Small Business survey).
- According to NSBA data from as far back as 1993, there is a clear correlation to a small business owner’s ability to hire and his/her ability to get financing.
- Startups make heavy use of personal equity and traditional debt, with over half using their own personal savings. Census Bureau data show that employers made greater use of financing than did nonemployers, but they also continue to rely on personal savings. (Small Business Administration Office of Advocacy).
How much funding do startups and small businesses receive?
- Almost half of all business owners surveyed for the Guidant Financial/LendingClub State of Small Business survey said they used less than $50,000 total to acquire or launch their business. Another 18% spent up to $100,000.
- Half of low-risk startup financing applicants were denied funding due to insufficient credit history. What’s more, 19% of low-risk startup applicants and 12% of all startup applicants are unsure why they were denied funding (FRBNY’s Small Business Credit Survey 2016).
- In the United States, SBA approved over 68,000 loans in the 7(a) and 504 loan programs in FY17. These programs provided over $30 billion to small businesses (SBA).
- In Canada, 5,189 loans were made to Canadian small business valued at $971.2 million. The average loan size was $187,168 and start-ups and businesses operating less than one year received the majority of loans at $588.3 million, or 60.6% (Government of Canada).
- Most startups who applied for financing sought between $25K and $100K. Of those who did secure financing, 69% received less funding than they sought. (FRBNY’s Small Business Credit Survey).
Want to learn more? Dig into The Ultimate Alternative Finance Guide to learn more about the financing options available to help you start, maintain and grow your business.