Explore All Options for Small Business Loans
It’s no secret that a poorly performing economy has caused banks to tighten their purse strings, making small business loans more difficult to secure.
At the end of 2011, data from the Federal Deposit Insurance Corp. showed that small business loans of $1 million or less had fallen to the lowest point in more than a decade and had been shrinking consistently since June 2008. But recent statistics show a slight improvement.
The total amount of small business loans outstanding at the end of the fourth quarter of 2012 came to $586 billion, up from $584 billion in the third quarter of the year, according to the FDIC. It was the first quarterly gain in small business lending since the FDIC began tracking loans on a quarterly basis at the start of 2010.
Despite the quarterly gain, however, the lending environment for small businesses remains challenging. The December number was down from $598 billion in the final quarter of 2011 and $626 billion at the end of 2010.
That means those in the market for small business loans need to be tenacious and creative. Debt financing through a financial institution is the most traditional method of securing small business loans. But there are other options available to the budding entrepreneur.
Alternatives to Small Business Loans from a Bank
■ Grants are available through the Small Business Administration’s Small Business Innovative Research Program, particularly for technology companies. Entrepreneurs should also research state, regional and minority grants. There is “free money” out there that might be just waiting for you to apply for it. Competition is fierce for such financing and the funds may be restricted to certain uses, but for the right applicant grants may be a good alternative to small business loans.
■ If you’re tired of being turned down for small business loans from a bank, consider other sources, including friends, family, “angel investors” or venture capitalists, merchant cash advance and unsecured business loans. Each of these sources has its own risk. Borrowing from family and friends, while probably the least complicated in terms of paperwork, can have disastrous consequences on your relationships should the business fail and you lose their money.
■ It is estimated that a quarter million high net worth private investors fund more than 30,000 small companies each year. These “angel investors” can be a source for small business loans and also bring additional business expertise to a venture. The challenge, however, can be finding the right investor and if several invest as a group, managing their divergent interests can be a challenge.
■ If you’re beyond the startup phase of your business and ready to take it to the next level venture capitalists could be a source of small business loans. Generally, you need to be generating revenue, have a strong team management team in place and be ready to eventually sell the business or take it public with an IPO.
Venture capitalists are funding pros who expect to make a quick profit on an investment. The downside to this type of small business loans is it only viable for fast growth companies and the owner must be willing to share control of the enterprise. And while future funding might also be available from the VCs after an initial cash infusion, the borrower should be prepared to sell the business or go public within three to five years.