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When Your Bank Won't Make a Business Loan

On two occasions, I’ve been turned down for a startup loan by my banks. One told me I had to be in business two and a half years to get a loan and the other turned me down because I have a bankruptcy in my past. I have this sincere and all-consuming desire to open my business and make a good income from it. Where can I go for financing? —D.L., San Luis Obispo, Calif.

Small business lending has been tight for the past few years, due to a combination of stricter lending standards embraced during the financial crisis and a downturn in loan demand. Although U.S. commercial lending is on an upward trend this year, startup business funding from banks tends to be nonexistent, even in the best of times.

Most loan officers want to see at least two years of solid revenue and a track record to fuel future success before they will consider making a small business loan. Add a bankruptcy on your record within the past seven years, and your chances with even the most knowledgeable and empathetic bank officer are pretty much nil, unless you have a business partner with good credit or someone who is willing to co-sign a loan with you.

"Bankers want to make loans: It’s how we make money. And we live and work with businesspeople in our communities and we want to see them succeed," says Robert C. Seiwert, senior vice-president and director of the American Bankers Assn.’s Center for Commercial Lending & Business Banking. "But we make loans. We don’t knowingly make equity investments in businesses because we don’t get paid for that."

While getting a bank loan is something you should put off for a couple of years, the good news is that a recent study shows that small businesses that have had past bankruptcies do not fare any worse than their nonbankrupt counterparts. Here are alternative funding sources you can investigate:

• Find ways to bootstrap your startup so that you can fund it yourself. There are myriad business services available online, offered for free or at low cost. If your business idea is one that you can build up gradually on nights and weekends, you can keep your day job so you don’t need to live off the income from your business. With reasonable technology costs, home-based service companies often start operations for under $10,000. Some get started on even less.

• Talk to friends and relatives about whether they can help you with a short-term loan or small investment in your startup. Make sure you put legal agreements in place with these people to avoid disputes about repayment or equity shares later on.

• Crowdfunding is a relatively new solution, facilitated through online platforms designed to support businesses and creative projects. Some crowdfunding sites are aimed at funding artistic projects with donations that do not have to be repaid; others basically arrange peer-to-peer lending. Look at popular sites such as Kickstarter and Prosper to get an idea of how the process works. One caveat: Many of the loan-focused sites will request your credit score and charge you a higher interest rate if your score is low.

However, Eric Eckardt, founder and chief executive officer of VBizPartner, says his new site does not take credit reports into account as it helps entrepreneurs raise money through their social networks. You can propose the interest rate you want; most small business owners are currently choosing from 4 percent to 7 percent, he says. "Some are amortized and some are interest-only, with a balloon payment at the end of the term. If they start [to raise funds] and are not generating interest, they can come in and change the interest rate," Eckardt says. His company, based in Saratoga Springs, N.Y., takes a 5 percent fee on any money raised.

• Microfinance may be an option for you. Check with your city or regional economic development center. These agencies have a mandate to boost businesses in their area and many offer resources for entrepreneurs. City or county personnel may be able to refer you to a regional nonprofit investment fund or a community development agency that makes loans to microbusiness owners in your area. They also may have ties to local angel investors, although you will have to get your business running and make substantial investment in it yourself before you’ll be eligible for private investment.

• As you’re getting your company operational, establish a relationship with a local or regional bank that specializes in small business lending. Get to know some of the bank officers, perhaps through your local Chamber of Commerce or municipal business-development association, and keep in contact for future loan possibilities. Credit unions also make small business loans, so opening an account with one of them and inquiring about their lending policies can’t hurt either.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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