With the Banks Deserting us, Entrepreneurs go Unconventional for New Small Business Loans
The infamous banking system bailout was President Obama's first major action upon coming to power, and as far as it goes, it was a success. The entire banking system would have fallen apart without it. But when the government just gave away boatloads of free money to irresponsible banks, a big reason was so that they would go out and lend small businesses enough money to get a little action back in the economy. So now the banking system is somewhat tottering on its feet again, the banks seem to be so scared of taking any kind of risks and falling into that black hole again, that they refuse to lend. They just want to have nothing to do with any loan applicant if they can't provide a huge collateral, show them a spotless credit record, and in general show them that they are so well off they don't need a loan in the first place. This wasn't the deal; the banks that got their bail-out money were supposed to enable entrepreneurs by making new small business loans and the like. So where do small businesses turn to, now that the banks have turned their backs on them, and the government doesn't seem to be doing much about it either - at a time when you can't even get a good credit card spending limit anymore.
There are still options, unconventional ones, for venturesome entrepreneurs on the lookout for new small business loans. The federal New Market Tax Credits program for example is a Treasury Department idea, that's been around for about 10 years now. They get an annual $5 billion budget, to apply on low income areas in all states of the country, and they fund community economic development projects. Of course, it becomes a little complicated when you want to actually apply for financial help under this plan. For instance, your new project must create new jobs to qualify. But all the rules they have for this get so complicated, that if you want to borrow $250,000, you'd have to spend so much on retaining a CPA and a lawyer to understand what the hell is going on, that it would not really be worth it.
Peer-to-peer lending, operates for people who have much smaller needs, and have less time for formalities. Places like LendingClub.com and Prosper.com are places that people with spare cash, can offer a small loan placing a classifieds ad. People out looking for new small business loans, who have reasonable credit scores can apply; the website holds an auction to find you the best deal, accepts a fee and some kind of commission too, and hooks you up with your lender. Of course, you will expect to pay a pretty hefty interest - around 20%; but in today's environment, that might actually sound like a deal.
Or how about receivables financing? If you have a business supplying stocks to retail businesses, retailers will expect you to give them a credit line, to allow them time to actually sell the stock in retail, and collect before they pay you. This kind of financing is actually drying up now. If you have a lot of stock out, and can't wait long enough to collect on everything, you can go to a receivables exchange and sell your credits, in exchange for hard cash. But these can be somewhat hard to come by - you need excellent credit. In general though, new small business loans, are going to increasingly be available through unconventional channels like this. It would seem like banks, with their impossible rules and tightfistedness, were simply relics of the past in today's world.