Alternative Financing for Small Businesses

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When Marsha McVicker, owner of Errand Solutions, needed a cash infusion for her patient and employee services company, which provides hospitals and corporations tools to increase wellness and productivity within their organizations, she thought she could count on her bank. Wrong. The bank cited economic conditions and the impact on her company, and turned her down flat.

In her quest to find working capital, she was able to obtain a $75,000 loan through the Women’s Business Development Center’s small business lending program. Since then, her company has exceeded every goal set as terms for the loan, such as reducing overhead and increasing profitability through growth. Furthermore, the company is repaying the loan ahead of schedule.

Ms. McVicker is one of a growing number of business owners seeking alternative forms of financing to sustain and grow their businesses. “We got this loan at a time when we needed it most,” she notes.

Two local nonprofit organizations – the Women’s Business Development Center (WBDC) and ACCION Chicago – are reliable resources for business owners who can’t get a bank loan and need financing. Through a grant from the Illinois Department of Commerce and Economic Opportunity obtained in October 2010, the WBDC provides loans up to $75,000 to business owners in the State of Illinois. ACCION Chicago makes loans up to $25,000.

The purposes for the loans range from inventory and equipment purchases to business marketing, payment of licensing fees and other expenses associated with building and growing a business. The loans are fully or partially secured with business and personal assets and have maturities up to five years. Loan amortization begins during the first year. There are no out-of-pocket fees at the time of closing except collateral filing fees, and there are no charges for early loan payoffs.

“Business owners who need a smaller loan and are unable to pursue traditional banks may find these lending resources ideal,” says Eva Brown, WBDC’s director of the Access to Capital program.

For businesses that need slightly more cash, the federal government offers small business loan financing through two departments: the U.S. Small Business Administration and the U.S. Department of the Treasury. “These financing programs are contributing to economic growth and jobs during this difficult economic cycle,” explains Judith Roussel, Illinois district director of the Small Business Administration.

The SBA loans include the Community Advantage Program, a pilot aimed at increasing the number of SBA 7(a) lenders by including, for the first time, non-bank community-based lenders that already have experience lending in economically-challenged markets. The loans, with a maximum size of $250,000, feature streamlined paperwork. In most instances, the loans are approved in five to 10 days. The SBA offers an 85 percent guarantee for loans up to $150,000 and 75 percent for those greater than $150,000.

The SBA’s Intermediary Lending Pilot Program provides up to $200,000 in commercial loans through intermediaries for borrowers with declining collateral values or lower credit scores due to the economic downturn. The funds can be used for working capital, real estate, and the acquisition of materials, supplies and equipment. More information about these programs is available at www.sba.gov.

The U.S. Treasury’s Community Development Financial Institutions (CDFI) Fund awards money to organizations working in economically depressed communities that, in turn, make loans to start-ups and business owners that want to expand their enterprise. CDFIs provide financing to residents who want to buy their first home, individuals who want to start a business and owners of established businesses like a neighborhood printing shop, beauty salon or restaurant. To find a CDFI in your community, visit www.cdfifund.gov.

“The interest rate on these alternative loan programs is typically higher than a traditional bank loan because of the inherent higher risk in the transaction,” Ms. Brown cautions. “Pricing is usually dependent upon the risk profile of the client.” However, under SBA’s Community Advantage Loan Program, interest rates are capped at the same levels as SBA’s other 7(a) Loan Programs, assuring rates that are competitive with traditional bank loans.

“The bottom line is, if you need funding and your bank can’t provide it, one of these alternative loan programs may be a solution,” Ms. Brown says. “Study the options in detail before deciding which is best for your particular situation.”

Hedy_Ratner

About Hedy M. Ratner

Hedy M. Ratner is founder and co-president of the Women's Business Development Center, the largest, oldest and most comprehensive and successful women's business assistance center in the U.S. She blogs about entrepreneurship, working women, success stories, small business and more in “Windows to Business Success.”