3 Ways to Get Start-up Cash During Tough Times

Consider these additional sources of capital.

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It's no secret there have been better times to find capital for a start-up. About half of domestic banks surveyed in April by the Federal Reserve Board said they had tightened lending standards on loans to small firms over the previous three months.

Likewise, the number of business loans made through the U.S. Small Business Administration's popular 7(a) program was down about 19 percent from October through April, compared with the same period a year before, according to Eric Zarnikow, associate administrator for SBA's Office of Capital Access. The dollar amount of loans approved declined about 8 percent. "What we're seeing are fewer smaller-dollar loans, so the average loan size has increased," he says. (The SBA is not a direct lender; rather, it offers partial guarantees to eliminate some risk to lending partners.)

And while overall demand for SBA-backed loans is down, Zarnikow says lenders are finding the creditworthiness of many who are coming in for loans isn't as good as it was a year ago. Although many factors impact creditworthiness, he notes some borrowers may have taken on more consumer debt or lost collateral in their homes.

In addition, there are indications that home equity lines of credit have become harder to obtain, particularly for those in markets that are experiencing declines in housing values, Zarnikow says.

So should you turn to angel investors and venture capitalists? Unless your company will offer something overwhelmingly unique, don't count on them for help. "You have to realize how few companies they finance out of the number that are requesting financing," says John Bjeldanes, a San Diego-based business counselor with SCORE, which offers advice to small businesses. "To build hopes of having some angel or venture capital firm come in is not logical."

Of course, there are other options. In addition to your own savings—and possibly a newly obtained severance package—here are some additional sources of capital to consider:

• Friends, family, and associates. If you ask for money, says Bjeldanes, have a written agreement stating the interest rate and repayment terms "so everyone understands what's going to happen." Virgin Money can help you manage such business loans.

• Credit cards. Use plastic wisely. "It's the lender of last resort," says Dennis Ceru, who teaches graduate courses in entrepreneurship and business strategy at Boston University and Babson College. "You're carrying a very high cost of capital on your books. For anyone who goes down that path, I advise them to pay that off first and quickly."

Bjeldanes warns, "If handled incorrectly, it can kill a company."

• Peer-to-peer lending marketplaces. New websites like Prosper, Lending Club, and Zopa match qualifying borrowers with regular folks willing to help out with loans.

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