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Sources of Small Business Financing

How to get Money for your Small Business


The best sources of business financing now are not necessarily the same as before the Great Recession. Small businesses struggled during the Great Recession to find financing to carry on their operations. They are still struggling during the recovery to find sources of business financing as those sources have changed.

The key is finding a good interest rate and a source of financing that fits your individual business. Here are some possibilities:

1. Community Bank Loans

community bank, source of small business financing

Community banks, the small local banks that we see on the main streets of the towns across America, were marginalized when the banking industry was deregulated during the 1980s. The community banks that remain may be the saving grace for small businesses as the U.S. economy shakes out after the Great Recession.

Community banks are not the branches of the big multi-national banks that you see on every street corner. Instead, they are small, local, and independently owned banks that have ties to your individual community. They also have correspondent banking relationships with the larger banks so they can provide the services to you that the big banks do.

Correspondent banking means that small banks have agreements with larger banks that allow them to use the larger banks for services to for its customers that the smaller bank does not offer.

Community banks usually accept deposits from its customers, make loans, and do not do much with an investment portfolio like a larger bank does. Interest rates may be lower and they tend to know their customers personally. They often make Small Business Administration Guaranteed Loans. They may be the wave of the future for small business bank financing.

2. Small Business Administration Guaranteed Loans

Small Business Administration financial programs, small business financing
from Missouri

Many financiers and economists think 2012 may be "the year of the SBA guaranteed loan." Why? 2011 was a banner year for the Small Business Administration loan. In 2011, the SBA guaranteed a record in small business lending with the previous record set in 2007, the year prior to the Great Recession. From 2010 to 2011, SBA lending increased by a dramatic 35%.

The Small Business Jobs Act was passed in September 2010 and called attention to the SBA 504 loan. This jobs act allowed business owners to use the 504 loan to refinance commercial debt with lower interest, lower cost SBA financing, which saved them a good deal of money and literally saved many small businesses.

The 504 loan is useful in other ways. Refinance proceeds can be used for owner-occupied real estate, machinery and equipment, itemized business expenses, and proceeds for closing. This law expires in September 2012 and savvy business owners should scurry to make use of the law before it expires, although there could be an extension until the economy is on more solid ground.

As for 2012 and SBA loan guarantees, it is looking good so far. The SBA hopes it is on track for at least as good a year as 2011 and perhaps better.

3. Community Development Financial Institution

community development financial institution - community bank - source of small business financing

The U.S. Department of Treasury funds private financial institutions that operate as community development financial institutions. The Community Development Financial Institutions Fund (CDFI) does not seem to be widely known among small businesses as a source of capital for small businesses. However, it certainly is a source of capital and is waiting to help your business.

As the linked article discusses, the purpose of CDFI-financed institutions is to provide capital and affordable credit to under-served areas of the U.S. To that end, several financial organizations were recently approved. Some are The Progress Fund, located in Greensburg, PA, Kentucky Highlands Investment Corporation, located in Somerset, KY, and Idaho-Nevada CDFI, located in Pocatello, ID.

CDFI's are a well-kept secret but are phenomenal sources of funds for small businesses. Check out the article for a list of CDFI's that may be near you.

4. Micro-Loan Financing

micro loans, microfinance, microlending

Micro loans are excellent sources of business financing for companies who cannot obtain financing elsewhere. If your company has been hurt by the recession and you need cash flow for working capital, for example, then a micro loan may be just what you are looking for. Micro loans can come from independent sources or government sources of micro loans such as the Small Business Administration.

Check out their Micro Loan Program.

5. Peer-to-Peer Lending

peer-to-peer lending, source of small business financing

Peer-to-Peer lending is just what it sounds like! It is quite simply people loaning money to other people. Put another way, it is investors loaning money, in order to earn a return, to people who need it for a variety of reasons. There are several peer-to-peer lending sites out there that bring investors and borrowers together in an auction-type lending format. Usually, if you are a borrower, your interest rate is lower than bank interest rates since the middleman is eliminated.

Peer-to-peer lending is not usually used directly for business purposes. However, entrepreneurs borrow using this method all the time and invest in their small businesses.

Two prominent peer-to-peer lending platforms are Prosper and The Lending Club. You need a reasonably good credit score to get a good interest rate at peer-to-peer lending platforms.

6. Crowdfunding as a Source of Business Financing

crowdfunding, source of small business financing

Crowdfunding is the hot new source of business financing. The Jobs Act, recently passed by Congress and signed by the President, has made equity-based crowdfunding legal in the U.S. There are details to work out with the SEC. This means that the rewards-based crowdfunding platforms that already exist in the U.S., such as Kickstarter will be joined by equity-based crowdfunding platforms.

Equity-based crowdfunding means that investors will buy a piece of your firm when they invest in it. Rewards-based crowdfunding means that when individuals loan you money they get a reward for doing so. If your business needs money, check this out!

7. Asset-Backed Lending Joins the Mainstream as a Source of Financing

asset-backed lending, source of small business financing

Asset-backed lending, in the past, has been most popular in a down economy and it was certainly popular during the Great Recession. We expect to see asset-backed lending as a permanent source of small business financing in the future. It seems to have come of age. Borrowing money against receivables through organizations like The Receivables Exchange has been an excellent source of financing for companies who have better collateral than they do credit score.

Purchase order and equipment financing are two other forms of asset-back lending that firms can use in order to make use of their collateral in raising money for financing for their firm.

8. Angel Investors are Still in the Financing Game

angel investors, source of small business financing 2012

Funding from angel investors is starting to come back after the recession. Angel investors funded the health care and technology industries at a fairly consistent pace in 2011. The marketplace, however, remains uncertain and volatile in 2012 and angel investors are hesitant.

As a group, angel investors say they are not interested in simply ideas - like social networks or group commerce ideas like Groupon. Instead, they would like to see entrepreneurs apply new technologies to older industries. They are interested in actual product prototypes.

Angel investors are looking for entrepreneurs with new products and technologies, merging with old industries, that they can invest in and earn a high return, greater than 10%. Otherwise, they are not interested. Remember that they are usually a second-tier financing option. Entrepreneurs have to bootstrap themselves and get their business off the ground before approaching angel investors.

9. Venture Capital as a Source of Funds for Business Financing

venture capital - source of small business financing in 2012

The venture capital industry is recovering from the recession, but is not yet back to the levels it enjoyed pre-recession in 2007. Venture capital funding, however, was up some 22% in 2011 over 2010, which was good news. The software and biotechnology industries received most of the available venture capital money in 2011. Medical devices were next on the list.

Venture capitalists seem to agree with angel investors about funding companies in 2012. However, they are looking at the planned IPO for Facebook, developments in cloud computing, mobile computing, and security technology as investments they may be interested in. In late 2011, venture capitalists were most interested in getting in on companies needing late stage development financing and that does not seem to be changing for 2012. Entrepreneurs with solid ideas for a good product and a prototype in the industries that are "hot" are always of interest to venture capitalists as they are looking for a high return on their investment.

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