Growth5 Blog

Wednesday, March 25, 2009

With Traditional Funding On Hold, Some Alternate Funding Resources

I saved an article from the WSJ this past fall as a reminder of alternate funding sources for our startups. With traditional lending almost non-existent, here are the alternate resource suggestions from the article:

1. Microloans are small loans (typically, in the range of $5,000 to $25,000) extended to entrepreneurs who can't secure funding elsewhere. Many microlenders are non-profits; for example, Accion USA , part of Accion International, relies on donations from charitable organizations and individuals to provide business loans and training to entrepreneurs.

Microlenders often focus on a particular interest, such as making small loans to female or minority entrepreneurs. For example, one female entrepreneur received a $5,000 microloan at an 11% rate through Count Me In, the lender helping women entrepreneurs. The loan, secured when her business was still based at home, enabled her to move into her first warehouse.

To find a microlender, contact your local SBA office or check the Association for Enterprise Opportunity's searchable database.

2. Peer-to-Peer Networks: Business owners might also try tapping peer-to-peer lending networks, such as Prosper, Lending Club and Zopa. Here's how it works: borrowers list the amount they need, details about their business and why they need the loan. Some borrowers claim they need a cash fix (these loans usually cap out at $25,000) to expand product offerings or move into new locations; others are seeking capital to cover start-up expenses, such as advertising or web site costs. Then, individual lenders decide whether or not to offer them funding. In many cases, these lenders are fellow entrepreneurs looking to make a nice return while assisting other business owners.

3. Merchant cash advances or "factoring" has seen a surge in demand since banks retreated from lending. Under this type of financing, a company doles out a cash advance (usually, a lump sum) to a small merchant or entrepreneur. Then, the merchant repays the sum by routing a portion of their future credit-card sales back to the cash-advance company, generally at a hefty premium.

4. A growing number of business owners are turning to credit unions and private lenders who rely less on credit scores and more on a borrower's business model or track record. Seeing a new opportunity for revenue growth, credit unions have made a big push into the small-business market in recent years.

Private lenders are another option. An example, On Deck Capital, which offers loans based on business performance, rather than a borrower's personal credit history.

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