Small Business Financing

With the recent credit crisis, everyone’s talking about how hard it is to borrow money, even for small businesses that are showing profit and have established a good credit history. A lot of small businesses get financing through the owner’s personal credit/equity, or from family and friends, but even friends and family may be hesitant to part with the savings they still have after two years of economic downturn and investment value loss. While it seems natural to query whatever bank you use for your regular business account for financing, you may find that larger banks are unwilling or unable to offer you the financing you need to stay in business.

Step One: Research your Options

Before you go out in search of a loan or other financing, do some research. You’ll need a business plan with projected earnings and, if available, past earning records. You’ll also need a basic understanding of how loans work, including compound interest and penalties for missed or late payments. If you’re using your personal finances as the backbone of your request, lenders will examine aspects of your financial history like past utility payments, historical income, and other factors. It is a good idea to talk to a lawyer and to read whatever you can find about borrowing money. Most importantly, when you go in for the meeting with a prospective lender, you want to make sure you have all your ducks in a row. Call ahead and find out everything you’ll need to bring to your meeting. Make sure you have all the necessary paperwork, and keep it organized, so you can avoid prolonging the process.

If your regular bank turns you down for financing, there are other options:

Visit Smaller Banks

Visit smaller, independent banks in your area. Smaller banks deal with a smaller overall amount of money and therefore are not in as great a danger of losing everything and going out of business. As per my post on April 3^rd, small businesses are persevering through the economic crisis better than big businesses because they have already cut out the fat. Big businesses have been overstaffed and pampered for years, and aren’t accustomed to cutting corners. The same goes for banks. Big banks that have loaned billions of dollars to individuals and businesses stand to lose everything if the bulk of their borrowers default on loans. Small banks may be less panicked right now, and therefore more willing to loan money to strong, promising small businesses.

Check with Independent Lenders

Every city has organizations designed to provide financing to small businesses and individual entrepreneurs. They can often offer competitive interest rates and more flexible payback schedules than banks, who are bound to their corporate policies. The SBA may be able to help you find independent lenders in your state or locality. In my family business, a bakery, we once borrowed $3500 for an emergency refrigerator repair, from a small lending company just a few blocks from our storefront. These independent lenders offer personal service, less red tape, and a much smaller bureaucracy than big banks.

What about Grants?

Another idea is to seek out grants. The Small Business Administration not only offers federal loans to small businesses, but also has programs that may allow access to grants (which do not need to be paid back). Grants are available for various types of businesses, especially minority-owned and women-owned businesses.

These are just a few ideas. The main point is not to be discouraged if your first attempt at getting financing is unsuccessful. At the federal, state, and local levels, there are a variety of possible financing sources for any business that shows promise. If you’ve only checked with one bank, you may be missing out on better opportunities elsewhere.