Alternative funding sources: 5 places to look

Lenders aren’t bending over backwards to help out small businesses right now. So what’s plan B? Familiarizing yourself with proven alternative sources.

Despite some recent encouraging economic signs, 75% of domestic banks said they have tightened credit for small businesses, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey in April. That’s up from 70% in the January survey.

But more firms are finding success through these non-traditional funding options:

1. Fed-backed loans. After the passage of the American Recovery and Reinvestment Act (ARRA), the weekly loan dollar volume on small business loans, such as 7(a) and 504 programs, jumped 40%.
   Added bonus: ARRA allows the Small Business Administration to temporarily waive a fee it charges banks — which is in turn passed on to the borrowers.
2. Credit unions and community banks. These institutions, credit unions in particular, were largely unaffected by the housing crisis and are issuing loans to small businesses as the lending outlook improves.
3. Peer-to-peer lending. These networks are experiencing a resurgence thanks to tightened credit. Examples: Virgin Money’s speciality is setting up business loans between friends, family and associates; Lending Club will only set up credit-worthy borrowers with lenders.
4. Microlenders. These lenders are more willing to take a chance on start-ups or businesses with questionable credit histories because they rely on donations from individuals and charitable organizations.
   Downside: Microloans usually carry higher interest rates than bank loans. The Small Business Administration offers microloans and offers interest rates between 8% and 13%.
5. Asset-based loans. These lenders purchase a company’s accounts receivables for 80%-90% on the dollar — to lend against them. LSQ Funding is an asset-based lender that only works with small and mid-sized businesses in the U.S.