Banks may be denying more small business loan applications, but company owners still have options. An up-and-coming solution for business financing gives entrepreneurs an alternative to adjustable-rate credit card debt.

Managing your business with drive and creativity can get you a long way-just look what it did for Apple co-founder Steve Jobs. Creativity can influence your business direction, the products or services you offer, and even your financing.

If you need capital for your business, make sure that you leave lots of time to find it. Many small business owners today are having a hard time securing bank financing-even those who are armed with good credit, detailed business plans, and thorough financial projections. Even though small businesses commonly need bank debt to expand into new markets, fund seasonal inventory purchases, improve products and services, etc., a tight lending environment is forcing entrepreneurs to look elsewhere for infusions of capital.

Bank lenders lukewarm about small business


Lenders' lukewarm reception to small business owners isn't a new development. For many years, the Small Business Association (SBA) has been providing lenders with loan guarantees to improve the attractiveness of certain small business loans. In recent months, however, it appears that even these protections aren't enough. Some lenders have been raising their SBA loan qualification requirements, and others have been dropping such offerings entirely. As a result, the number of SBA loans funded is down significantly from 2007.

Grassroots lending


If the bank turns you down, you may find funding success in peer-to-peer lending (p2p lending). This alternative source uses an Internet-based community interface to manage loan transactions between individuals, bypassing the need for a bank or financial institution. People who have money are considered lenders; those who need it are borrowers. Business owners can log on to a p2p lending site, create a profile, and then use that profile to sell their story. Lenders will review the profile and, if they feel the applicant is a good credit risk, contribute small dollar amounts to a loan.

Peer-to-peer loans offer some advantages over credit card advances. Both options provide unsecured debt, so there's no risk of having the business property seized if debt payments aren't made on time. But p2p loans carry a fixed rate of interest, which is typically lower than the adjustable rate charged for cash advances. One p2p website, Prosper.com, allows you to specify a maximum for your loan's interest rate. Another site, LendingClub.com, sets your rate based on the creditworthiness of your request-allowing you to benefit from your prior credit history.

Loans funded through Prosper.com and LendingClub.com amortize over three years and carry no prepayment penalties.

At a time when traditional credit lines and limits are being slashed without notice, you may have to get creative with your business financing. Be inspired by what Steve Jobs said when his engineers told him they couldn't make the iMac: "I'm the CEO, and I think it can be done."

Published on November 8, 2008