Small-business bucks.

AuthorSpiker, Kim
PositionFinancing options for companies with less than $5M capital

Alternative financing options for companies under $5 million

Where do you turn to find financing for your business? Typically, your best bet is the local bank or a non-bank lender. Whether you're looking for $25,000 or $1 million, there's a good chance a lending institution will be able to fill the need, even if the deal requires a little help from alternative-financing programs.

What is alternative financing and when is it needed?

Alternative financing has become a buzzword among business owners who are looking for loans but can't seem to get straight commercial financing. To respond to the need for business lending, government has stepped in and created programs that make financing less difficult for businesses and lenders alike. There are many reasons why alternative options might be needed to make a loan work:

* The business may be a start-up venture, or just too young to have a reliable track record. The business also may be in a risky industry, like the restaurant business.

* The loan may be too small to make it worthwhile for the lender. Many lenders consider business loans under $100,000 to be small. The lender must do the same amount of work to close a $25,000 loan as it would on a $1 million deal, but the bigger loan generates more profit for the lender.

* The loan may be big enough, but lending policies of the bank may not make the loan feasible. Perhaps the loan term that the lender can offer isn't long enough for the borrower. Maybe the lender can't offer as much money as the business needs, or requires the borrower to pick up a share that's not affordable.

But whatever the reason conventional financing isn't an option, because of alternative-financing arrangements, lending institutions are still the dominant places to go to find capital. Government agencies are typically the creators of alternative-financing programs. Examples include the guaranty and microloan programs of the U.S. Small Business Administration and the Capital Access Program run by the Indiana Development Finance Authority.

These government programs typically don't make direct loans. Instead, they try to work with the banks and other lending institutions by guaranteeing part of the loan, which takes away some of the risk involved.

"Many years ago SBA was primarily a direct lender," says John Bates, the SBA's assistant district director for economic development. "Programs, to some extent, competed with the normal channels of commercial lending. Today, however...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT