Creative loan help for mom and pops
Posted: Wednesday, March 04, 2009 1:20 PM by Eve Tahmincioglu
Filed Under:
Financing, Back office
I know banks are tightening the screws on lending but before you head over to your local loan shark, let's think outside of the business-financing box for a second.
There are a few sources of money we haven't thought about -- credit unions and microlenders.
These are not traditional pathways to money for small businesses, but things are changing.
Yesterday, The Wall Street Journal ran
a great story on how credit unions, largely unscathed by the subprime debacle, are doling out loans to small businesses.
According to the article:
About 27% of the 8,147 credit unions in the U.S. offer business loans, according to the Credit Union National Association, a trade group based in Washington, D.C. The amount of business loans was up 18% last year to almost $33 billion from nearly $28 billion in 2007. The average loan size is about $215,000.
There are restrictions on how much credit unions are allowed to dole out in business loans, but the industry is trying to push for new regulations that will let them get bigger into small business lending, much to the chagrin of big banks.
Another source: Microlenders -- those lenders that typically bail out people in Third World countries. Well, hello opportunity.
A story in this month's issue of BusinessWeek's SmallBiz magazine says more entrepreneurs in the good old USA are turning to these little guys for loans.
From the story:
Microlenders are nonprofits that historically make small loans of up to about $25,000 to owners with spotty credit or slim experience. Their money comes from private donors and sometimes the government. As banks clamp down, says Sara Ignas, a spokeswoman for the Association for Enterprise Opportunity, a microlending trade group, "our members have seen an increase in demand for loans from those who a year ago could get a bank loan."
If neither of these help out, Chris E. Talis, a Senior Partner at Hedgerow Mergers Acquisitions, suggests some other alternatives:
--Existing equity holders. If your business is owned by multiple stockholders or partners you may be able to raise capital by going back to the original stockholders. You may also create stockholder's loans whereby the company would owe each individual stockholder principal payments plus interest (it's important to keep it at arm's length, especially for IRS purposes).
--Factoring. You may be able to find lenders who will advance funds based on specific invoices. These lenders will try to understand your business and then figure out a way to give you upfront cash on a newly generated invoice. They will generally advance you about 75 percent to 80 percent of the invoice amount and charge you anywhere from 1.5 percent to 3.0 percent per month in fees until it is collected. The amount generally has to be paid within 90 days.
--Asset based lending. Some banks will lend you funds based on the company's assets. Whether it's equipment, real estate, inventory, accounts receivable or vehicles, banks will lend using the company assets as collateral. The advance rates will vary, usually based on liquidity of the assets. The cost to this type of financing can be costly as well as complex.
If these ideas aren't up your alley, there's still hope.
The federal government appears to be riding in on a lending white horse.
Yesterday, the Department of the Treasury and the Federal Reserve Board announced they were launching the Term Asset-Backed Securities Loan Facility, aka "TALF," in hopes of generating up to $1 trillion in loans for small firms and consumers.
"The Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated asset-backed securities backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans."
Basically, the government says it wants reinvigorate lending at traditional outlets and "assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy."
The first funds are expected to be disbursed at the end of the month, so get ready to get in on the action.
