Joe Bennett figured getting a loan to open a supper club would be easy. After all, the St. Paul (Minn.) resident had spent 25 years managing several private restaurant chains. But loan officers at U.S. Bank saw things differently. The best they could offer was a home equity line of credit, though Bennett specifically wanted a small business loan that would establish his credit and credibility as an entrepreneur. "They didn't get from my experience that I could be successful in the restaurant business," says the 45-year-old. But a local credit union did get it. In July, Twin City Co-Ops
Federal Credit Union of Falcon Heights, Minn., underwrote $100,000 for a downpayment and improvements on Bennett's Chop & Railhouse, which opened in November.
Entrepreneurs frustrated with their banks, or thinking twice about tapping home equity, should take heart. There's a growing list of places to find cash for your business. "There is a big opportunity to serve small business borrowers better than they have been served in the past," says Aaron Fine, director of the retail and business banking practice of Mercer Oliver Wyman, a research and consulting outfit in New York City. "We are getting more players into the space."
The need is substantial: Every year, small businesses borrow an average of $600 billion in loans of less than $1 million, according to the Small Business Administration. Fine says when that's added to the cash entrepreneurs raise from credit cards, friends, and family members, small businesses borrow as much as $1 trillion.
1. The Credit Union
Most people join credit unions through their employers, but individuals can join community or small business coalitions and sign up as well. "Virtually anyone can join a credit union now," says Mike Schenk, vice-president of economics and statistics for the Credit Union National Assn. in Washington, D.C. Credit unions have long offered loans to businesses, but after a federal banking rule change in 1998, they began participating more broadly in the SBA 7(a) loan program.
Why try one? As nonprofit organizations, credit unions don't aim to make money from their customers, so their loans typically carry lower interest rates than bank loans do. "They return their earnings to members in the form of lower loan rates and fewer and lower fees," says Schenk. In 2006, the average interest rate for a three-year unsecured business loan at a credit union was 11.2%, compared with 12.7% for the average commercial loan from a big bank, according to Schenk. The average loan amount was $175,000.
Service is often better, too. Bennett says his old bank never returned calls, but his credit union loan officer has been very responsive. "He asked me a ton of questions," says Bennett. "We struck up a great relationship right off the bat." Teri Charest, a spokesperson for U.S. Bank, says she can't comment on Bennett's situation directly, but the bank loaned more than $15.6 billion to small businesses last year, including startups.
There are more than 8,700 credit unions nationwide. To find one, go to www.creditunion.coop or call 800-358-5710. Ask about the union's membership requirements and services. And because many don't have branches, make sure the union is convenient to you or has atms available.
2. The Commercial Bank
MagnetBank is a lender with a twist. Launched in September, 2005, the Salt Lake City-based institution (www.magnetbank.net) is the only independently owned and operated industrial bank focused exclusively on commercial lending. Because of its unique charter, the startup doesn't need brick-and-mortar branches, nor must it shoulder the costs of trying to bring in deposits to fund its loan business. Instead, it buys deposits directly from Wall Street when it needs to fund a loan it has underwritten. That lowers costs. Rather than visiting a branch, small business owners apply for loans online and one of the bank's loan officers visits their location. Magnet's rates are comparable to those throughout the industry, but Chief Executive Officer Darrell Pittard says that because the bank only handles lending, it can often respond to business owners in hours, not weeks. "The most important thing is to move quickly," says Pittard. "We don't have any other products to sell but commercial loans." In its first year, the bank closed more than $650 million in loans, with most falling between $2 million and $10 million. The bulk of its loans are for real estate, but loans can be used for working capital or other expenses as well.
3. The Factor
You probably know that factoring can be used to take receivables that have yet to be paid and turn them into cash. But AdvanceMe's take on the formula is to pay small business owners for sales that haven't even been made yet. "We took the model and turned it on its head," says Glenn Goldman, CEO of the Kennesaw (Ga.) outfit. The company examines historical sales data and credit-card statements to determine the health of the business, then buys up to 90% of the company's future credit-card sales. You'll want to keep a close eye on your margins, though: Discounts range from 20% to 50%. The discount is determined by the business' finances, its industry, and other considerations. Cash advances range from $5,000 to $200,000, and approval can take just 48 hours. "We are very sensitive about making sure the small business owner doesn't get overextended; it's all about renewals," says Goldman. Linda Coughlin, founder of Metro-Home, a New York company that rents luxury apartments to tourists and businesspeople, uses AdvanceMe during her slow season. Her payment is based on her average monthly billings of $400,000. Says Coughlin: "It's a very strategic source of funding I can call on quickly, and it makes my cash flow management easier."
By Mara Der Hovanesian