Banks still aren’t lending or they way they used to — especially when dealing with small businesses. So what’s Plan B? Familiarizing yourself with proven alternative funding sources.
Despite some recent encouraging economic signs, 75% of domestic banks said they’d tightened credit for small businesses, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey in April. That’s up from 70% in the January survey.
But more firms are finding success through these non-traditional funding options:
- Fed-backed loans. After the passage of the American Recovery and Reinvestment Act (ARRA), the weekly loan dollar volume on small business loans, such as 7(a) and 504 programs, jumped 40%.
Added bonus: ARRA allows the Small Business Administration to temporarily waive a fee it charges banks — which is in turn passed on to the borrowers.
- Credit unions and community banks. These institutions, credit unions in particular, were largely unaffected by the housing crisis and are issuing loans to small businesses as the lending outlook improves.
- Peer-to-peer lending. These networks are experiencing a resurgence thanks to tightened credit. Examples: Virgin Money’s speciality is setting up business loans between friends, family and associates; Lending Club will only set up credit-worthy borrowers with lenders.
- Microlenders. These lenders are more willing to take a chance on start-ups or businesses with questionable credit histories because they rely on donations from individuals and charitable organizations.
Downside: Microloans usually carry higher interest rates than bank loans. The Small Business Administration offers microloans at interest rates of between 8% and 13%.
- Asset-based loans. These lenders purchase a company’s accounts receivables for 80%-90% on the dollar — to lend against them. LSQ Funding is an asset-based lender that works with only small and mid-sized businesses in the U.S.