In the aftermath of the 2008 fiscal crisis, banks are less eager to loan money to small business owners. According to a recent Federal Reserve Bank of Cleveland report, small business loans from banks have dropped 17 percent from the peak reached before the Great Recession.
That means you might need to look beyond banking to finance new ideas, and a growing class of alternative financing sources is filling the void left by gun-shy banks. Here’s a breakdown of options available to help grow your business or start a new one.
Nonprofit lenders: Credit unions, nonprofit organizations owned by members instead of shareholders, have begun to move into small business lending. In 2014, credit unions loaned $12.3 billion to businesses, a 64 percent increase from 2010, according to data published on creditunions.com. Though just a fraction of the industry’s overall loan portfolio, credit unions could become a more significant business lending player if the trajectory continues upward.
Community development financial institutions — or CDFIs — are another nonprofit financing source. Since 1994, the U.S. Treasury has provided more than $1.7 billion to these grassroots organizations tasked with improving low-income rural and urban communities. (A searchable database of CDFIs nationwide can be found here.) If your business is in a low-income area — which could include a gentrifying neighborhood — a CDFI could be a helpful option. Mission-driven rather than profit-driven, the institution might take a chance on your idea if you can show it will improve the economic vitality of the neighborhood.
Merchant cash advances: This option — essentially payday loans for businesses — is the most common form of lending available online to commercial borrowers. In return for lump cash advances, customers agree to give the online operators a share of future sales, typically credit card payments. The advances — usually short-term deals of less than $100,000 to cover immediate expenses — are convenient and quick. But they do come with a significant catch: If annualized, interest rates can top more than 100 percent.
Peer-to-peer lending: These online operators are essentially middlemen, connecting borrowers to lenders. Already established in consumer loans, peer-to peer companies are now expanding into the business sector, giving entrepreneurs a new option with more favorable terms than cash advances — typically repayment over two to five years with annual interest rates around 8 to 25 percent (still higher than the average bank loan). In early 2014, Lending Club, the biggest peer-to-peer player, started funding small business loans. Peer-to-peer competitors such as Funding Circle, Dealstruck and Fundation also lend to businesses. Sam Graziano, Fundation’s CEO, told the New York Times that he’s targeting businesses that “deserve a better product but don’t qualify for a bank.”
Crowdfunding: Though not a lending source, crowdfunding can be a useful way to secure financial backing for your business or innovative idea. The most well-known platforms, such as Kickstarter and Indiegogo, are rewards or donation based. Backers might receive, for instance, a cool new product, such as a watch, for a $60 donation. A handful of operators such as Fundable also offer equity crowdfunding in which qualified investors contribute around $25,000 a pop for an ownership share of a company. This area is expected to expand in the coming years as the U.S. Securities and Exchange Commission loosens regulations limiting the practice.
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