Three Smart Places to Find a Small Business Loan
Since the Global Financial Crisis, many small business owners are considering other ways to meet their financial needs. Rather than applying for a business loan at a national bank, these people are seeking alternative ways to finance their companies. Credit unions, government agencies and professional organizations can all help small business owners get the financing they need.
Small Business Administration Loans
The Small Business Administration guarantees loans for qualified applicants. In 2012, the SBA reported approximately $30.25 billion in loan volume. Once the SBA approves an application, the business owner can compare lenders to find the best possible loan terms from community banks and other approved SBA loan providers. Traditional lenders are more likely to offer better loan terms to small businesses with SBA guarantees because the lender's risk is minimized.
In 2011, the SBA launched the Community Advantage and Small Loan Advantage programs for small businesses. These loans, issued under the 7(a) loan program, are capped at $350,000 for a SLA loan or $250,000 for a CA loan. In the past, small businesses had difficulty obtaining modest amounts of funding to purchase new equipment or otherwise expand. These SBA programs make these smaller loans more attractive to lenders.
Small Business Loans from Credit Unions
During the economic recession, credit unions had fewer losses than traditional banks. Therefore, they also had more money to loan to small businesses. Now, they've become a popular alternative to larger banks for thousands of small businesses. Small business owners must qualify to be accepted into a credit union before applying for a loan there. Credit unions require that all members have a common bond. In many cases, credit union membership is restricted to people who live or work in a specific community or belong to a trade or professional organization.
While many people report that credit unions offer better loan rates and are more accepting of minor credit flaws, lending standards have begun to tighten. It's important to note that federal law caps the amount that credit unions can lend to only 12.25 percent of their total assets. Due to the increase of small business loan applications to many credit unions, loan officers have made the qualifying process more stringent. However, for small business owners who qualify, the credit union can be an attractive alternative to traditional banks.
Professional organizations also offer help to women, minorities and other groups who need small business loans. Like the SBA, the loan money may not come directly from the organization. However, these organizations help extract promises from banks and credit unions to issue loans to underserved populations. The Global Banking Alliance for Women, for example, encourages large banks to pledge to approve more loans for qualified women entrepreneurs.
Certain professional organizations may also encourage the use of angel funds, rather than loans, to meet the needs of a business startup. Some business owners reject angel funds because they accept business equity in lieu of a loan that must be repaid. However, many angel funds provide resources beyond financial help to encourage successful businesses. For a new business owner, angel investors can offer significant advantages.
Traditional banks still issue most of the small business loans in the United States. However, business owners should consider letting the SBA or a professional organization help them negotiate better loan terms. Once a small business owner has been accepted into a loan program, it's easier to find favorable loan terms. For small business owners who wish to avoid banks completely, credit unions can offer needed financing to qualified applicants.
- Consider applying for a SBA-guaranteed loan to get better terms from a bank or credit union.
- Business owners who qualify for credit union membership should investigate any small business loan offerings.
- Be on the lookout for professional organizations that offer loans or loan counseling to members or underserved groups.
- Angel funds can be a great traditional loan substitution, but small business owners will lose some business equity.