Topics:Starting a Business
A majority of small businesses fail in ten years; only half make it to the five-year mark.
Is that hard to digest? Those are findings by the Bureau of Labor Statistics, and they mostly remain steady through strong and weak economies.
Here’s why most of those businesses fail: money. According to a study conducted by Fractl, nearly a quarter of businesses say they ran out of cash; 13 percent complained that they lacked financing.
So who is getting financing? And how much cash are they getting? A recent study by Biz2Credit had some interesting answers.
You might assume that restaurants are less likely to receive funding because they have a high failure rate, but you’d be wrong on both accounts.
Fundera’s research concluded that “survival rates for food services are really pretty similar to other industries.” They’re likely to succeed or fail in similar numbers to the rest of the small business world.
And Biz2Credit debunks the second half of the myth — the restaurant and accommodation industry has the highest financing approval rate at 51 percent, according to their analysis of 2018 funding trends.
This could, in part, be due to the rise of alternative lenders. Banks prioritize mitigating their risk, and they still hold the assumption that many food service ventures are risky business. The bad press and misinformation surrounding food service failure perpetuates negative stereotypes, and it prevents many traditional lenders from giving their stamp of approval.
The rise in approval for the restaurant industry may also have something to do with average revenue; restaurant and accommodation companies average $509,996, the highest amount of any industry Biz2Credit analyzed.
While food service has stereotypes working against it, the health care industry has stereotypes working for it. Traditional lenders see health care companies as more stable and dependable, and they’re more likely to finance a health care startup. That might be why health care companies see 37 percent loan approval rates.
Though, interestingly enough, health care companies may soon be treated with the same hand of caution as food service companies. As health intersects with tech, digital health startups are receiving bad press for a string of failures.
Healthcare companies have the second highest approval rates, but they’re funded on average $49,835, the second lowest of any industry.
The IT industry boasts a 35 percent loan approval rate, and when a company is approved, it’s likely to see a large wad of lended cash. IT companies have the highest average funded amount at $102,029.
IT startups have ups, downs, and complete flops. But lenders usually have faith in high returns: the tech industry overall has returns of 34 percent, the highest of all ranked market sectors. It might also help that the average credit score for an IT company is 633, at the top of the industry pack.
Tailing the list of industry approval rates, personal services see 16 percent approval. Personal services can be a catchall category, including beauty and grooming, gyms, laundromats, landscaping, and cleaning. It’s plain to see that most of these services could be small businesses focused on serving a local community, and it might be hard to prove to a lender that expansion will be profitable.
The personal service industry’s low average credit score backs up this assumption that personal services might not be the best lending choice: personal service companies have an average credit score of 590. Most lenders want to see 550 or above for consideration, so some companies might dip below this requirement.
Are you worried because you operate a personal services business? No need. You can break the mold by impressing lenders with timely payments and a high credit score, a sound business model, and evidence of profitability.
Biz2Credit created a helpful infographic detailing its findings. Check out their study for the full industry breakdown.
If you’re looking into business loans yourself, check out our top lenders. You’ll have several options for your business's unique situation, regardless of your industry.
August 17th, 2022
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