Already some financing trends are emerging as 2011 begins. Entrepreneurs have been learning since the credit market tightened that funding does not necessarily have to come from large banks. In fact, several non-bank sources of funding are gaining in popularity. Let's examine five of them:
1. Credit Unions
The National Credit Union Administration (NCUA) found that the cooperative financial institutions or (credit unions) are among the most active for offering small loans. Credit unions provided business loans of more than $33 billion in 2009 — a huge increase from the $12 billion in 2004.
Biz2Credit research shows that credit unions and other non-bank lenders, including community development organizations, are the lenders that are actually providing capital to small businesses at the moment. Why?
- Credit unions are local in nature, are more connected with the small businesses in their areas, and do manual underwriting. (Whereas the bigger banks are more automated and less flexible with regards to credit scores.)
- Community-based lenders understand issues related to low personal and business credit scores and are usually less rigid in their funding parameters.
- Smaller lenders' decision-making is quicker, and they are often more willing to provide more money as a business grows.
- Many times, credit unions can give better lending rates than the bigger banks.
2. Micro lending
Micro lenders help people start small business ventures by offering small loans usually below $10,000 and sometimes much less than that. The popularity of micro-lending has spread to the U.S. entrepreneurs looked to start business ventures with less than $50,000 business loan (to reduce their debt risk and to have a better chance of securing capital). ACCION, a member of the Biz2Credit lending platform, is the largest organization providing micro financing to small businesses. The organization gives loans starting at $500 and averaging more than $5,000. The Association for Enterprise Opportunity's searchable database is a good means to research on micro lending programs across the U.S.
"Bootstrapping" means to make use of one money-making venture in order to fund another. For this purpose, one may tap on personal savings, ask friends and relatives for money, and provoke vendors to start supply for delayed payment terms. While it may work in the beginning for start-ups, it is not a solid long-term financing option.
4. Crowdfunding or Crowdsourcing
Crowdfunding or crowdsourcing has been popularized by the website Kickstarter.com. Crowdsourcing means a group of people working to fund a project through a cluster of small donations. Kick starter launched the idea by providing financial help to struggling artists. In return for their financial support, donors receive get goods or services and/or equity stakes and interest payments. This idea is becoming popular in business ventures, but it is not advisable for companies that need larger amounts of money to get started. Because it is social networking-based, it may also be difficult to raise capital for businesses that are not appealing to younger donors. For instance, a trucking company, which is certainly an industry that is not flashy, may have difficulties in securing funding. (I will be detailing the pros and cons of Crowdsourcing in an upcoming column.).
5. Funding for Environmentally Conscious Entrepreneurs
Investors' Circle is an organization that seeks find for funding and businesses that address social and/or environmental issues. It seeks to get at-least one million American to invest 1% of their assets in local food systems by the next decade. The goal is to help entrepreneurs engaging in local food and agriculture to find the seed funding. Investors who support the movement are encouraged to support ventures that will bring profits to the community, create jobs, and foster the local food chain.
Supporting small business growth remains a priority for America's economic leaders, as was evidenced by Fed Chairman Ben Bernanke's speech entitled "Overcoming Obstacles to Small Business Lending" at FDIC Forum yesterday in Arlington, VA. The event brought together experts such as Chairman Bernanke, FDIC Chairman Sheila C. Bair, Thomas D. Bell, Jr., Chairman of the U.S. Chamber of Commerce, incoming Chairman of the House Financial Services Committee Spencer Bachus, and Karen Mills, administrator of the Small Business Administration. The forum featured discussions by government and private sector leaders about the issues that are constraining the availability of credit to small businesses.
Rohit Arora, an expert on small business lending, is co-founder and CEO of Biz2Credit (www.biz2credit.com), which connects small business owners with 150+ lenders and service providers via its safe online platform. KPMG ranked Biz2Credit among the top 100 emerging companies in 2008.
ALSO BY ROHIT ARORA