Startup Financing During the Credit Crunch
by Larry Slusser on April 8th, 2008
Consumer loans and small business financing has become incredibly difficult to obtain. What started with the mortgage industry has crept into the small business arena where lenders have tightened up the criteria for lending. This is creating a need for business owners to look somewhere else for financing. With rising defaults in revolving credit, the fees are higher and underwriting is tougher, making it more difficult for small business owners to obtain any sort of financing-even more difficult than in a normal market. Looking for alternatives for financing is where small business owners must look rather than using their credit card debt or home equity lines of credit.
Borrowing from your retirement plan is usually the last thing most advisors would recommend. If at all possible, consider liquidating some stock and lending it to your company, which is better and can be paid back sometime down the line provided the loan has been properly documented.
Another source for obtaining funds would be from family and friends, and are usually cheaper than a regular loan. Parents may even be willing to give a no-interest loan, while friends and business associates may agree on a rate that is a bit better than their high-yield savings account, which would make the loan worthwhile to them. It is typical for business loans from friends and family to be approximately one to two percent higher than a high-yield savings account, yet two to three percent lower than the market rates. Even though taking the money in the form of equity is preferable, it is better to take it in the form of debt, unless you are certain that your business will be able to give them a return on their equity.
Before venturing into an agreement with family or friends, it is important to note that the same patient repayment structure of equity can be arranged by creating a long-term grace period on debt with professional investors, which will seem more like an equity investment rather than debt. Plus these professional investors will not usually like the business owner to repay other investors before them.
One of the up and coming opportunities that are available now, is borrowing from strangers online. Looking for a person to person loan can be easy, enabling borrowers to seek loans from individual lenders who receive a good return for making a private loan online. These interest rates are usually higher, but during the credit crunch, can help the business owner to get started, or to survive.
Loans that are guaranteed by the Small Business Association are still available, at least for this year. Provided that the underwriting has not drastically changed in response to the credit crunch, lenders may still be willing to award small business loans. It is highly recommended to check out the SBA’s website for the current lending requirements prior to visiting the local bank.