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The Rise of Alternative Funding and the Decline of Traditional Banks

Published on May 13, 2013

Summary

Following the sequester, there has been an uptick in small and medium sized businesses using alternative funding to keep themselves afloat.
Piggy Bank - Alternative Funding In the weeks following the sequester, there has been a significant uptick in owners of small and medium sized businesses who need to raise capital to keep their business afloat or to fund the additional growth of the business. Before the sequester, the Office of Management and Budget noted the event could mean a reduction of nearly $1 billion in small business loans. Further complicating matters is the fact that loan processors could be furloughed, delaying the lending process. Even if a compromise is reached on a new budget, traditional banks have little incentive to open their collective pocketbooks, especially in a low interest rate environment. While this lending environment seems less than ideal, this climate has resulted in a flood of alternative funding sources, which can assist the business owner with their capital needs, even if the business is located in rural areas. In fact, the following options have proven to provide entrepreneurs and small business owners with the capital and support to open a new store, start an online business or make a living off of their passion:
  • Small, local banks – Community banks will loan money to creditworthy startups, primarily because they have protected themselves from the risky loans that took down their well-known brothers and because they may have “local” knowledge about the applicant.
  • Boutique banks – These are the banks that specialize in lending to small business. Often, boutique banks understand the entrepreneur and see lending to business owners as an opportunity for growth, rather than taking a risk.
  • Small Business Administration loans – The SBA has been doing its part to shore up the drought in available capital. For example, there are a number of programs, such as those set aside for former military that offer attractive terms. Additionally, their real sweet spot is embracing independent agents, who have their own bank and do nothing but SBA loans.
  • Angel investors – These private investors are more likely to make a small investment in exchange for an equity stake in the company. Angel investors typically do not demand a controlling stake, thus preserving the entrepreneur’s independence, while providing the needed capital to get up and running.
There are plenty of other tools, such as asset-based financing, factoring, and royalty lending. The latter involves the borrowing company paying back the lender from its future revenues. While traditional banking resources have tightened their purse strings, there are plenty of reliable choices available to business owners, even if they are in the beginning stages of incorporation filing. In fact, based on recent growth in entrepreneurs and small businesses, these days, there are more options than ever.