Best sources for capital infusion
Many small business owners are still feeling the pain from the financial crisis of 2008 when it comes to securing a loan for their businesses. However, credit markets are showing signs of improvement and new micro-lending organizations are sprouting up to fill the demand for small business loans along with traditional banks. Let’s take a look at these two popular methods business owners use to secure loans.
1. Conventional methods for securing a loan (Traditional banks and the Small Business Administration). In the past, small businesses relied on traditional banks for securing a loan, along with the Small Business Administration (SBA). The SBA is a government entity that guarantees loans for small businesses, it does not actually provide the loan. Rather, its guarantee incentivizes banks to take risks and lend to small businesses.
When a small business owner is actively seeking a loan from a bank that does or does not work with the SBA, he or she will need to have a well thought-out business plan, financial statements, and growth forecasts. (Here is a more complete list of things to consider when preparing a loan application.) According to Jeanne Hulit, the SBA’s New England region administrator, “Banks granting SBA loans are placing increased emphasis on business plans, cash flow and profit forecasts in deciding whether to lend.” More information regarding the SBA’s loan program can be found here.
Obtaining a loan from a traditional bank or a loan guaranteed through the SBA can be a difficult task for a company that is in the early stages of development. According to the Federal Reserve Bank of New York, small businesses fall into one of the following categories or stages:
Stages of a Developing Business
Stage one businesses are start-ups.
Stage two businesses have business plans and product samples but no revenues.
Stage three businesses have full business plans and pilot programs in place.
Stage four businesses have been in operation for some time and have documented revenues and expenses.
The New York Fed suggests that businesses in the first two stages of develop seek capital from non-traditional resources. Non-traditional resources can range from a friend to one of the many micro-lending organizations that have sprouted up. However, if your business is generating revenue, then applying for a loan from a bank or through the SBA is a viable option.
2. Micro-lending organizations. Even though the majority of small businesses receive loans from traditional banks or are guaranteed by the SBA, small business owners can turn to micro-lending organizations for securing a loan. Micro-lending is a great resource for small businesses that need a small amount of capital. According to Jay McDonald, from Bankrate.com, “The industry average micro-loan is $12,000.” For a lot of small businesses that are just getting started and are under-funded, micro-lending organizations are a great resource that can be used to secure the initial capital infusion they need to start building a revenue stream.