Finding capital in a tight lending environment

When it comes to small business financing, there’s finally some good news to report. The most recent edition of Small Business Lending in the United States, published by the U.S. Small Business Administration’s Office of Advocacy, reports that the small business lending climate has improved.  

In fact, the smallest loans (under $100,000) to small companies declined just 1 percent in 2009-2010, compared with a 5.5 percent drop the prior year. And, best of all, in 2010 the number of SBA-backed loans actually increased about 30 percent.

Although the overall economic picture is improving, finding funding for your small business is still a challenge.

Here are some options to consider:

Back to the banks: According to a report in the Wall Street Journal, banks are increasingly returning to character-based lending, instead of relying as heavily on credit scores and other numbers as they have been.

Banks are giving more weight to quarterly financial statements and considering outstanding sales or orders as factors in decisions. More banks, including Bank of America, J.P. Morgan Chase, PNC Financial Services Group and U.S. Bancorp, are adding small business bankers and launching “second look” programs, in which bankers take a closer look at rejected loan applications under these new terms.

Self-financing: If you need more than $250,000 and have collateral to put up, banks are more likely to be the best option. But what if you need much less than that? I recently spoke to David Nilssen, CEO and co-founder of Guidant Financial, who shared some creative ideas for getting financed. If you need less than $100,000, Nilssen suggests using credit card advances, tapping into your home’s equity or using a “self-directed IRA or 401(k)” to fund your business. (This is what Guidant Financial offers).

New SBA programs: The SBA recently launched two new loan programs under SBA Advantage. The Small Loan Advantage and Community Advantage programs both offer a streamlined application process for SBA 7(a) loans of up to $250,000. Small Loan Advantage is available through larger banks that are already SBA lenders; Community Advantage targets underserved communities by making loans through nontraditional financial institutions.
Factoring: If you’re starting or expanding a service business, a lack of collateral can be an issue, according to Ami Kassar, CEO of MultiFunding. If you don’t have real property, stock, assets or equipment to use as collateral, Kassar suggests using your receivables as collateral to finance your business through something called factoring. Factors buy your receivables from you, collect the money and keep a percentage of the money as payment for their services. Kassar cautions that you should investigate any factor thoroughly to make sure interest rates are reasonable and there are no hidden fees. (In many cases, you’ll pay higher interest rates to a factor).

Microloans: Do you just need a small amount of money, perhaps $10,000? Microloans, which typically max out at about $50,000, are offered through a variety of community organizations. Most of the time, microloans are targeted to specific types of small business owners, such as women or businesses located in economically disadvantaged communities. Contact the SBA (www.sba.gov) or your local economic development office to apply for a microloan program in your area.