Where To Get A Business Loan In 2012
This year shed light on several ways to get a business loan. Some were good, but as the industry changes, so much remains the same. When big banks said no to a business loan, others stepped up to fill the void.
First and foremost, a credit union is different than a traditional bank because it is owned by its members and technically not for profit. They tend to focus on customer deposits for revenues and attempt to originate competitive mortgages for their members. Membership to a credit union usually comes at a minimal cost and used to be industry specific. But things have changed and just about anyone can apply for membership. A credit union does have the ability to give out a business loan to its members but they amount of assets they can earmark for business loans is currently capped at 12.5%. There is a major push to raise this cap and allow credit unions to increase their place in the credit markets.
A little different, but also focused on extended local credit, are Community Development Financial Institutions, or CDFIs. They have been around for nearly 100 years but did not gain significant momentum until the creation of the Regulatory Improvement Act of 1994 when the Treasury got involved in funding CDFI initiatives and programs. Because of this Community Development Financial Institutions have access to SBA guaranteed business loans which expose lenders to less exposure than non-guaranteed funds. The CDFIs originated because these very lenders largely ignored communities in need who were plagued by poverty or lack of foreseeable profitability for a financial institution. Since the credit crunch of 2008, CDFIs have been a very viable alternative for those looking for a business loan.
In much the same spirit of credit crunch lending, Micro Lenders gained enormous popularity because of the ability to get very small loans without much credit history, if any at all. Initially most of the micro business loans were granted by private lenders in economic empowerment zones. An empowerment zone is an actual area which is designated for social, economic, physical and spiritual development. Before the establishment of such zones, these areas were again those neglected by traditional financial institutions who saw no upside to making a business loan based on the geographical location of the entity. But once capital was flowing into the area due to legislation, micro lenders began to look at a local business loan as an opportunity. A typical micro loan is around $1000 or less, but there are programs for up to $50,000 which can still be considered a micro business loan.
The last alternative funding source making news this year were Accounts Receivable Lenders, now commonly referred to as Merchant Cash Advances, saw dramatic increases in applications since the credit crunch. The merchant cash advance has evolved slightly over the years and is a business loan based on future credit card sales. Business owners pay back their predetermined loan when they receive payment from their credit card sales. The upside that if sales do not meet expectations, then the merchant pays based on the lower sales. The rates are high but for merchants with the need for quick cash to keep their businesses running while waiting on money from sales to trickle in, this is an attractive option.
Of all the business loan options above, Credit Unions seem to be the most favorable for the borrower. However, as with most favorable programs these business loans are for very attractive borrowers only. If you do not have a high PAYDEX you will not be approved. The other options do serve their purpose but accept for very specific businesses merchant cash advances are too expensive to be worthwhile and micro loans simple do not provide enough money to be safely capitalized for long term success.
So as evolution of alternative lenders over the past year shows there in new interest by borrowers to get a business loan which if nothing else shows that the capital markets are on the upswing. But, even the most prudent business borrower need to be comfortable with all the elements of such programs before agreeing to sign on the dotted line.