Fewer business owners applied for financing in 2017, but those that did enjoyed higher approval rates.

You might need money to make money, but a strong economy can mean business loans aren’t always necessary for small businesses. Only 40% of American business owners applied for a loan in 2017, according to a Federal Reserve survey — down from 45% in 2016. And with less competition, more business owners got approved for the full amount they requested than in the previous year.

Those who applied for loans tend to take the old-school approach. While there has been a slight uptick in online business loan applications, business owners still prefer applying through a bank. And those who applied online were typically from businesses having a hard time getting a traditional business loan.

How much do small business owners borrow?

The rate of small business owners looking for a loan might be on the decline, but they still borrow a lot: $600 billion each year, according to a 2017 survey by the Small Business Administration (SBA). That’s several billion more than Sweden’s GDP. Not including other types of financing like equity investments or buyouts.

That doesn’t mean that American business owners are running around with million-dollar loans. The average size of all business loans was $663,000 in 2017, according to the Federal Reserve. Though most business owners borrowed even less — especially outside of large commercial loans. More than half of all business loan applicants applied for $100,000 or less.

Businesses looking for larger loans played it safe with tried-and-true financial institutions: banks. Online lenders and peer-to-peer marketplaces were popular for smaller loan amounts, however.

• Visual — Avg loan size by lender type
• Table — Avg loan size by lender type

Most common reasons for taking out a business loan

Leveling up was the most common reason business owners applied for a loan in 2017 — what you might expect in a strong economy. According to the Federal Reserve, 59% of business owners applied for financing to grow and expand their company.

Most small business owners take out loans to expand their business, not to save a sinking business. That doesn’t mean some businesses weren’t hurting. The second most popular reason to apply for a business loan was to make up for cashflow problems. Over 40% of business owners wanted a loan to cover overhead expenses like payroll or keeping the lights on. Still, 26% of business owners thought they were doing well enough to refinance for a better deal.

• Visual — Most common borrowing reasons
• Table — Most common borrowing reasons

Business loans by industry

Farms, mines and other businesses in the non-manufacturing goods production and services industry applied for business loans at a higher rate than any other industry in 2017. Those in the retail, business support and customer service, and leisure and hospitality industries all tied for second — though their reason for financing wasn’t always the same.

• Most likely to need funds to expand: Non-manufacturing goods production and associated services. Some 65% of businesses that produce something that doesn’t take a factory to make — like apples and raw materials — needed financing to take advantage of a new opportunity.
• Most likely to need help with overhead: Professional services and real estate. This might come as no surprise — accountants, lawyers, real estate agents and other consultants are some of the hardest hit by seasonality than any other industry.
• Most likely to refinance: Retail. With record lows in unemployment, more people have extra money to throw around. Higher sales means members of this typically high-risk industry could get a better deal on debts they took out during leaner times.

• Visual — Applications by industry
• Table — Applications by industry

Banks are still the first place small business owners look for financing

Forget what you’ve heard about fintech companies making banks a thing of the past. Banks, large and small, still dominate business loans, and it doesn’t look like they’re going anywhere any time soon. Nearly half of small business owners applied for a business loan at a large bank in 2017 and half applied for a loan at a small bank. Online lenders only got about a quarter of business loan applications.

Other types of lenders only accounted for a small piece of the business loans pie. About 9% of business owners applied for a loan at a credit union and 5% went to a Community Development Financial Institution (CDFI). It makes sense: Both are usually small operations that don’t have the money to serve more than their communities. Banks also just have more recognition — raise your hand if you can name a CDFI near you — or even know what one is.

• Visual — Lender types applied to for business loans
• Table — Lender types applied to for business loans

Approval rates

Banks might be a popular place to apply for a business loan, but approval rates tell another story. The type of financing a business is applying for — and whether it’s backed by collateral — can also affect the odds of approval. Moreover, because a business was approved for a loan doesn’t mean it got the maximum amount of funds it applied for — that number is usually lower.

By loan type

Turns out collateral sometimes can help a business get approved for a loan. Auto and equipment loans had an 82% approval rate in 2017. Merchant cash advances, which businesses repay with a percentage of each credit card swipe, clocked a close second at 79%.

But lenders only approved 54% of SBA loan applications, loans backed by the government, business owners and sometimes even collateral. SBA loans might be designed for businesses that have struggled to get a loan somewhere else, but they come with their own winding list of eligibility requirements that look into everything from a business owner’s personal assets to past run-ins with the law.

• Visual — Approval rate by loan type
• Table — Approval rate by loan type

By lender type

CDFIs might have had fewer applications than any other type of lender, but their 88% acceptance rate beats banks out by a long shot. Less of a surprise is the 75% acceptance rate on online business loans — these types of lenders often have lower credit requirements or rely on alternative data like shipping numbers.

When it comes to banks, you’re better off going local — they accept business owners at a rate 12% higher than larger institutions. Credit unions are the hardest place to get a business loan, possibly because they don’t have the resources to give out the type of financing businesses need. Many credit unions don’t offer business loans at all.

• Visual — Approval rate by lender type
• Table — Approval rate by lender type

How else do Americans borrow for business?

Business loans aren’t the only way to pay for business expenses. Americans borrowed an additional $17.5 billion outside of business loans to pay for business-related expenses in 2017, according to research by finder.com. Nearly half of these were personal loans, which come with lower rates and can be easier sources of seed money for startups.

The same percentage of business owners either slapped business expenses on plastic or turned to friends and family for help — both popular sources for smaller expenses to pay back quickly.

• Visual — Other ways Americans borrow for business
• Table — Other ways Americans borrow for business

Are business owners who borrow feeling the blues?

Most business owners have no regrets about taking on debt in 2017. Only 7.3% of Americans regretted taking on business-related debt, according to a finder.com study. This might be explained by the fact that new businesses are sticking around longer. Nearly 80% of small businesses that started in 2016 were still open in 2017, according to the Bureau of Labor Statistics. And almost 70% of businesses that opened in 2015 are still around — and not all of these businesses took on debt.

America’s biggest debt regrets

5 tips to make taking out a business loan worth it

1. Take the time to compare lenders. It might be tempting to go with the first lender you come across, but your business could end up saving on interest and fees by finding a loan that fits your needs. Don’t have time to compare? Use a business loan marketplace.
2. Watch your spending. You might feel flush with cash after getting a business loan, but letting your spending get out of hand could lead to overspending and put you out of business.
3. Have a budget. Budgeting out how your business plans to spend the loan can make it a lot easier to keep track of expenses and ensure you can afford your loan payments when they’re due.
4. Sign up for autopay. Automatic payments can save you more time and brain space than you’d think. Plus, some lenders might even offer a discount on interest — though this is more common with personal loans.
5. Have a separate account for your loan funds. This trick can help you prevent overspending and keep track of where the funds go.

Bottom line

We’re living in time when businesses are booming — and the business loans numbers show it. Fewer businesses felt like they had to take out a loan in 2017 than in the past, with the most common reason for borrowing was to expand. Working capital is still a necessity for some industries, however, especially those that rely on clients.

Want to learn more about business financing? Check out our guide to business loans to find out how it all works.