There’s no secret banks are putting the squeeze on business lending and credit lines. In fact 55% of small to midsize businesses surveyed by the National Small Business Association reported difficulty in obtaining credit last year. And that was in early 2008 before the credit crunch really hit.
So where can business owners turn for working capital as banks say no to business financing? Here are three places to consider during the 2009 credit crunch:
CREDIT UNIONS
The local credit union has long served the interests of members by offering attractive rates, services, and products not generally available through traditional banking institutions. To date, Credit Unions have weathered the sub prime mortgage crisis far better than banks and members are turning to them for business financing.
This trend is reflected in last year’s 18% growth rate increase for member business loans (as reported in the 2008 US Credit Union Profile published by the Credit Union National Association on February 25, 2009). These not for profit cooperatives helped Americans through the Great Depression and today offer assistance to business members with alternative financing options.
MICRO LENDERS
A recognized champion to business startups and minorities, the Micro lender provides small loans, generally ranging from $500 to $40,000. These are often offered by nonprofit organizations to stimulate growth in lower income communities.
As reported in a recent Wall Street Journal Article, a Micro lender’s flexibility and willingness to accept borrowers deemed a higher risk by banks can be appealing to the small business borrower in today’s economy.
FACTORING
As banks say no, businesses are turning to factoring companies to raise needed cash and working capital. Rather than lending money based on the strength of a business, a factor purchases an outstanding invoice or accounts receivable at a discount.
Once goods or services have been delivered to a customer a business may wait 30 to 60 days for payment. A factoring company solves this problem by providing an immediate cash advance on the invoice (generally 70 to 80%). When the invoice is paid the factoring company retains their discount fee and releases the remaining reserve to the business. The ability to obtain cash without debt is just one of the many Benefits to Factoring Invoices and Accounts Receivable.
When times are tough businesses often turn to credit cards, home equity, or loans from family and friends. It’s good to know that credit unions, micro lenders, and accounts receivable factoring can provide alternative financing solutions to businesses in need of working capital during the credit crunch.
Micro-loans are an important product for small business. Many business owners don’t need $100,000 loan, but rather $7,000 to buy a new piece equipment or keep inventory in stock. Not only do SBAs provide micro-loans, many CDFIs do as well (community development financial institutions).
I work for a nationwide micro-lender, ACCION USA, and we get calls every day from people who can’t access financing through banks or SBAs. Our more flexible guidelines help small business owners grow their business and build their personal credit.
Part of our mission is also financial education. Many people don’t check their credit and 80% of consumers have errors on their reports. CDFIs like us provide these resources, like financing and education, because small businesses fuel our economy and provide jobs for the entrepreneur and their employees.