Recently in Alternative Financing for Small Businesses Category

May 14, 2010

CDFIs--An Alternative Loan Source for Small Businesses

Unable to secure a traditional bank loan for your small business? You might want to check out your local Community Development Financial Institution ("CDFI"). CDFIs are government-designated lenders--usually small banks, credit unions, nonprofits, and others--whose mission is to promote community development. In return for access to funding sources like grants and Treasury and SBA financing, they agree to make at least 60% of their loans to low income borrowers.

As reported in a Wall Street Journal article by Emily Maltby, most of their loans have gone to start-ups and struggling businesses that wouldn't qualify for a traditional bank loan because they are considered too risky. In fact many CDFIs only work with businesses and individuals that cannot get a traditional loan. In making loans, CDFIs don't focus on a borrower's credit history. "We look at character, willingness to do the work of the business and willingness to repay the loan," says Mary Mathews, president and chief executive of a nonprofit CDFI.

You'll need to find the CDFI in your area that is the right fit for your business. Each CDFI serves a certain region and they all have their own loan criteria. You can find a complete list of CDFIs on the Treasury's website.

For a comprehensive guide to all aspects of running a small business, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).

February 24, 2010

Banks Urged to Look Beyond Numbers When Lending to Small Businesses

The Board of Governors of the Federal Reserve System issued a press release this month urging banks to make small business loans based on a broader-based analysis of the viability of a business rather than simply a credit score. In essence, the Board of Governors is asking all banks to act more like community banks which are often more willing to lend to small businesses. Community banks often have a better understanding of the local market and the borrower as opposed to commercial lenders who simply rely on numbers and credit scores in their analysis.

The statement assures banks that "financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis. Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

As reported in a Business Week article by John Tozzi, "Banks have been pulled in two directions over commercial lending. The Obama Administration and members of Congress have urged them to expand lending to small businesses, but regulators want them to reduce their risk. In this statement, the regulators say they won't penalize banks for making loans to businesses in troubled industries or locations, as long as the bank has soundly assessed the borrower's ability to repay."

February 13, 2010

Obama Proposes New $30 Billion Fund to Promote Small Business Lending

President Obama has announced a new lending plan which would provide smaller community banks with new capital to lend to small businesses. Under the proposal, which will require Congressional approval, the government would use $30 million it receives back from Wall Street banks repaying bailout loans under the Troubled Asset Relief Program (TARP) and set up a new Small Business Lending Fund. This fund would be available to banks with assets under $10 billion--primarily smaller community banks. These banks account for 50% of all small business loans.  

"These are the small, local banks that work most closely with small business -- they're usually the ones that provide them their first loan, and they watch them grow through good times and bad," Mr. Obama said. . . "The more loans these banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up."

President Obama has also proposed continuing other small business lending incentives such as waiving fees and increasing guarantees for loans backed by the Small Business Administration. In his State of the Union address, President Obama also said he will be proposing new tax breaks for small businesses that create new jobs or increase hours and wages on existing jobs.

 

October 22, 2009

New Lending to Help Small Businesses

Yesterday President Obama announced some new lending to help small businesses: smaller community banks who loan to small businesses will be able to borrow at low rates from the Treasury Department's Troubled Asset Relief Program and the current loan caps on some SBA programs will be raised, though Congress will need to approve the raising of caps on the SBA loans. According to Jeremy Quittner of Business Week, changes to the SBA program that we reported on previously have encouraged about $13 billion in new lending, so these stimulus programs do seem to be providing some much needed loans to small businesses. 

June 27, 2009

Peer-to-Peer Social Lending Sites

An article in Business Week this week points out that unsecured credit for small businesses is drying up and that there's a clear need for new types of small business financing. One new type of financing that has emerged in the past year or so is "social financing": Peer-to-peer lending sites pair up borrowers who list their loan needs with private investors who are willing to offer loans at certain rates. The social lending websites getting the most press are Lending Club, Zopa, Prosper, Loanio, and Kiva.org. With the country in such a credit crunch, these online services may be worth looking into.

To understand the basics of seeking a loan for your business, see Nolo's article The Lowdown on Business Loans.

June 19, 2009

Avoid Funding Your Business With Credit Cards

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An article posted in today's New York Times reported that, as of April, 59 percent of America's small firms relied on credit cards to help finance their day-to-day operations, up from 44 percent at the end of last year. Because credit card terms have worsened recently, it makes sense to find other forms of financing than credit cards. 

One innovative new company that provides financing for small businesses, OnDeck Capital, offers loans up to $100,000 based on a business's cash flow and/or credit card transactions. OnDeck collects the loan repayments by automatically debiting your bank account for a small amount (typically $100) each day, assuring you won't get behind on loan payments.

OnDeck's small loans are easier to qualify for than a traditional loan and more quickly processed, but interest rates aren't low -- usually 18% to 20% -- and you still must have sufficient cash flow to repay them. One note of caution: OnDeck requires that business owners sign a personal guarantee, meaning your house, savings, and other assets are at risk if your business fails while you still owe them money and you don't have the cash to pay it. But definitely worth a look -- they're at www.ondeckcapital.com.


To learn more about raising capital for your business, see Nolo's Business Financing, Loans & Capital area.

June 9, 2009

SBA Loans Will Soon Be More Available

It looks like it will soon be easier to get an SBA small business loan, says a recent post by Stacy Perman on Business Week's Small Business Blog. As part of the 2009 stimulus package, the administration provided $730 million toward the SBA small business loan guaranty program and the SBA micro-loan program.

To learn about SBA loans, check out this presentation on SBA loans from SBA.gov. Skip ahead to slide 12 to get into the four main SBA loan programs (you'll probably be interested only in the 7(a) guaranty program and the micro-loan program).

March 19, 2009

Appeal to Your Customers for Financial Support

Here's a new idea: songwriter Jill Solube opted out of dealing with a record label and instead asked her fans to donate money to her to pay for her latest recording. She offered various premiums for different levels of donations, like having your name in the liner notes, free song downloads, and getting to sing on her next record ($10,000). She reached her goal of $85,000 in just six weeks with money left over. You can listen to her story about soliciting donations on Marketplace.