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How Your Industry Affects Your Small Business Loan

Approaching a lender that better understands your industry can improve your chances of securing the loan you need and help to ensure your company’s success.

Most small business loans are sourced from major banks, who usually base lending decisions on cold, hard data without appreciating your sector's nuances.

Therefore, industry-specific loans can be an excellent option, especially if your business sits within a less mainstream sector. An industry-specific lender will already understand how the sector works and the real-world risks involved. Also, certain cash requirements in your business plan that may concern a major bank are likely to be familiar to a specialized lender.

We’re going to look at some of the most common reasons for taking a small business loan and the benefits of borrowing from an industry-specific lender.

Top Reasons to Get an Industry-Specific Loan

The reasons we’re listing here relate to start-ups and existing businesses, so they’re relevant to most firms.

1. Purchasing Equipment

When you’re starting up, you need the relevant tools and equipment to get up and running.

Later, once the business is established, you’ll occasionally need to buy new equipment to either replace your existing kit due to wear or malfunction or support the company's expansion.

2. Purchasing Inventory

You need to have stock before you open your doors, so you need the initial investment.

You also need to consider seasonality and emerging trends. You may not have enough cash to invest in a stock when you need it, so a loan can help to cover that, with the expectation that you’ll recoup the cost of the loan through the sales generated.

3. Cash Flow

Also known as working capital, there may be times when you need to make up for a temporary shortfall in income. For example, if you have customers with unpaid invoices, you can’t always wait for them to pay before reinvesting the money. The rest of your business needs to keep working.

Consolidating debt is another reason that a small business loan could help your cash flow.

4. Prepare for a Future Bigger Loan

If you have a new business, it probably doesn’t have an extensive credit history, limiting your borrowing power.

However, by taking out a small loan to begin with, and building your credibility by paying it on time, you may be able to secure more favorable terms when you need to borrow a larger amount in the future.

5. Expansion

Once your business is established, you’ll naturally want to expand your operation.

That will probably incur costs relating to new or additional premises, recruiting additional staff, and additional marketing to let everyone know about the changes.

Taking a loan to cover your expansion expenses will avoid having to take them out of your operating profit. That way, you can avoid any impact on your day-to-day profits while the new investment starts generating its own income.

Which Industries Are Most Likely to Apply for Loans?

According to Fora Financial, these were the top five industries that applied for loans in Q1 2019:

  • Construction and renovation
  • Transportation and trucking
  • Automotive
  • Retail
  • Health care/doctors

Now we’re going to take a closer look at the top two:

Construction and Renovation

It’s no surprise that just over 15% of the loans facilitated by Become (formerly Lend Express) were granted to firms in this sector.

With an ever-increasing demand for new business premises and housing, construction firms must invest in machinery such as cranes, bulldozers, and excavators. 

Particularly in the case of new construction, that equipment represents a significant up-front investment. Therefore, it makes sense that firms would take out the best small business loans to cover that expenditure.

On bigger projects, it’s common for payments to be in stages in line with construction progress, so taking a loan helps with the construction firm’s cash flow.

For smaller construction or renovation firms, the costs involved are usually only recouped once the building has been renovated and sold on, so having access to a loan can be critical in preserving their working capital.

Transportation and Trucking

The transportation sector is under constant pressure to get people and goods to their respective destinations as quickly and efficiently as possible.

With 51% of global retailers offering same-day delivery and consumers spending trillions of dollars - around $14.1 trillion in 2018 - transport firms must ensure that they have enough vehicles and drivers available to meet those requirements. 

The public transport sector is seeing more demand as ecological concerns become more prominent. With increasing numbers of routes and more frequent services, transport providers are forced to invest upfront in vehicles and drivers.

What Separates These Industries From the Rest?

According to a Q1 2019 study from Fundera on the top 10 industries most likely to secure a loan, there are some key indicators.

This is based on loans granted by major banks, which usually have a lengthy, data-driven application process. Consequently, they tend to be more risk-averse than industry-specific lenders who understand their respective industries' operational realities.

  • They’re all mainstream industries: that are easy for the big banks to understand when making their risk assessments.
  • Lowest business failure rates: lenders view them as lower risk.
  • Firms can build up a good credit history: The average company age among successful applicants was 7.75 years.
  • Industries that typically take loans for working capital: which are normally repaid over short periods, sometimes even in a few months.

Read More About Industry-Specific Loans

No two industries are the same when it comes to small business loans. Learn how to better your chances of getting that crucial loan. 20+ business types covered.

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See Our Additional Guides on Industry-Specific Loans

Bottom Line

Although the major banks are still the main lenders to small businesses, they’re not the only option, and they may not be the best option.

If you operate in one of those industries perceived by the big banks as low risk, then the major lenders can be a good option. However, the application and approval process usually takes longer than applying through a specialized lender.

Conversely, if your business sits within a niche sector, then you’re more likely to get a loan from a specialized lender who is better positioned to carry out an accurate risk assessment.