Despite the fact that the government has thrown hundreds of billions of dollars of taxpayer dollars at banks, many businesses are finding that credit markets are tight and in some cases virtually non-existent. Home-based, small and medium-sized businesses are being hurt most because they don’t have the currency – common or preferred stock, or debt – to raise cash.
Both the Bush and Obama administrations took or have taken steps to alleviate the credit crunch, but credit flow is still slow and those businesses looking to traditional banks for loans are finding themselves shut out. Fortunately, there are alternatives to Bank of America, Wells Fargo, Citigroup and their ilk.
Credit Unions: Despite a massive infusion of cash into the U.S. banking system, small and medium-sized businesses are finding it difficult to secure loans from national and regional banks. Credit unions, however, are lending and doing so aggressively.
In 2008, credit unions lent approximately $33 billion to businesses, up 18% from 2008, according to the Credit Union National Association, a trade and lobbying group. Of the more than 8,100 credit unions in the U.S., more than a quarter offer commercial loans, and the average size of current loans outstanding is about $215,000.
Credit unions are tax-exempt, not-for-profit co-ops designed to provide a stable banking environment for individuals. Credit unions don’t take on risky loans because their goals are capital preservation and to reward co-op members with dividends, lower loan fees and higher interest rates. This structure hurts credit unions during boom times, but in the midst of a recession, credit unions benefit from increased deposits and a lack of toxic assets. While a traditional bank is engineered to earn profits for shareholders, credit unions are engineered to cover operating costs while returning excess revenues to co-op members.
The main issue facing credit union lending at the moment is a law that caps at 12.25% the percentage of assets a credit union can lend to businesses. This cap was geared towards keeping credit unions from battling banks for commercial lending business. An attempt to raise the cap to 20% of assets was met with little Congressional backing last year, but in light of the continued deterioration of the economy, there’s hope that this year lawmakers will allow credit unions to increase their loan-making abilities.
One-person, small and medium-sized public relations firms looking for a cash infusion should look into credit unions as a possible source for loans. See the Credit Union National Association’s website (http://www.creditunion.coop) for information on credit unions and to locate a credit union near you.
The Small Business Administration (SBA): President Obama’s stimulus package includes $730 million that will be directed towards shoring up the market for loans backed by the SBA. If used properly, these funds may help unlock commercial lending for small businesses. (SBA loans are repackaged as debt securities, but the market for such securities has dried up; the stimulus money is being steered towards the secondary market with the hopes that the primary market will re-open once old loans have been re-sold.)
The SBA does not make loans itself unless a business is impacted by a natural or other disaster. Instead, the SBA acts as guarantor for a portion of loans and works to connect small businesses with lenders. Many small businesses use SBA-backed loans to purchase office or manufacturing space, things that come cheap these days thanks to the burst real estate bubble.
Several years ago, a company I worked for used a SBA loan to buy a small office building. The company worked with the municipality where it was based and received a tax-break for creating local jobs. The tax-break was actually a freebie because the company had already created the jobs and was renting the office space it eventually bought. Regardless, the deal worked out well for the company, which added a valuable asset to its balance sheet and later established a line of credit with its SBA lender when it wanted to expand the business.
Dealing with the SBA can be a long and tedious process, but with proper research and the right plan, and with stimulus dollars helping unclog the SBA system, it’s worth a shot. More information can be found on the SBA’s website (http://www.sba.gov).
Person-to-Person (P2P) Lending: Many small businesses start with investments from friends and family. The age of the Internet has allowed for an expansion of this concept, and today a number of websites now connect investors with individuals and businesses that are looking to raise cash.
P2P lending is used for everything from paying off credit card bills to funding start-ups. Established businesses most often turn to P2P lending in order to expand, but increasingly some businesses are using P2P lending to fulfill short-term cash needs (such as when receivables are not being paid on time).
There are some drawbacks to P2P lending – interest rates, for example, may be high. However, P2P loans are unsecured loans and can be quicker to obtain than bank loans, especially in today’s environment. The Wikipedia page for P2P lending (http://en.wikipedia.org/wiki/Person-to-person_lending) has a list of P2P lending websites, but be sure to do your own research on companies that provide such services and read the fine print if you go this route.
This article, written by Ben Silverman, originally appeared in PR Fuel (http://www.ereleases.com/prfuel), a free weekly newsletter from eReleases (http://www.ereleases.com), the online leader in affordable press release distribution. To subscribe to PR Fuel, visit: http://www.ereleases.com/prfuel/subscribe/.