With banks still holding fast to their funds, credit remains scarce for businesses. But that shouldn't put you off the capital hunt. With a little persistence and creativity, you can still find financing. Here are five ways to get started:
- Seek a microloan. Small businesses with reasonably good credit have a fair shot at getting a small line--usually up to $50,000--from a microlender, even if they've been rejected by a traditional bank. The Fox Valley Micro Loan Fund requires applicants to submit a turndown letter from a bank. While Fox Valley does consider credit history, it doesn't set a target credit score, focusing more on the circumstances affecting one's score.
- Use your assets. As banks have pulled back on lines of credit, asset-based lending has leapt forward. At First Business Capital Corp., you can secure a line of credit against eligible receivables in which the lender fronts you 85 percent of the total, then forwards the remaining 15 percent after your customer pays in full. You'll pay about 1.5 points to 3 points over prime for the advance, but, says Michael Colloton of First Business, "that's how we can lend to companies that don't have the greatest creditworthiness."
- Turn to the web. For a small amount of working capital, try peer-to-peer networks, which marry lenders and borrowers online. Though it's a relatively new concept, "over the next three to four years, peer-to-peer lending will take a significant leap in providing necessary capital to small-business owners," says Steve Bloom, an advisor and the former chair at SCORE's Atlanta chapter. Sites such as prosper.com, lendingclub.com and loanio.com allow entrepreneurs to search for lenders and borrow up to $25,000, with three-year terms and widely ranging rates.
- Go around the big banks. If you have good credit and a profitable business, research local banks to find a business-friendly lender that hasn't been caught in the mortgage maelstrom. When Marco Giannini, 33, founder of pet food maker Dogswell, needed some flexible cash, he beelined for California United Bank, which lends mainly to manufacturers and distributors. He received a $3 million line of credit based on receivables and inventory. Before applying, he increased his chances by scrubbing his balance sheet and making sure his P&L statements were in line. "You need to make sure your numbers are realistic," he notes.
- Sweet-talk your vendors. Often overlooked as a source of credit, vendors are uniquely motivated to keep their customers' business going and will often work out a payment structure to help clients survive a rocky period. When Giannini first started out, he received favorable terms from his manufacturers, easing the cash-flow burden for his company. If you can show a vendor your profitability, says Giannini, they'll take a chance on you.