Guide to Your Next Steps When the Bank Says No

Creative options can jump-start your business, give you needed cash flow

By Mary Sit, corporate writing/articles/Web content/scripts, Mary Sit Communications

Small business owners can improve their chance of finding a loan if they understand three things:

1. Find out why the bank turned thumbs down. Common reasons are bad credit, high debt-to-equity ratio, and inadequate collateral. Ask what steps to take to improve your chances next time.
2. Learn what banks and governments are doing to help entrepreneurs. The Community Redevelopment Act of 1977 encourages banks to make more loans to small business owners in their communities. Special loans are often set aside for women and minorities.
3. Non-bank sources are willing to take on higher risks, but you'll pay a higher interest rate and give up part ownership of the firm.

Action Steps
The best contacts and resources to help you get it done

Tap government-backed loan sources

The U.S. Small Business Association (SBA) has four loan programs to help small businesses. The SBA guarantees loans made by private institutions, thus reducing their risk.

I recommend: Go to SBA.gov to find out how to pre-qualify, then see banks that offer SBA loans, including Chase.com and Bank of America. Check out Grants.gov to find more than 1,000 Federal grant programs worth more than $400 billion.

Look into micro loans

Check out nonprofits that lend money to small business owners. Economic Development Agencies (EDAs) and Community Development Corporations (CDCs) offer small loans of $35,000 or less to micro-enterprises with five or less employees.

I recommend: Find out about financing in your state at The Association for Enterprise Opportunity. If you need $500 to $25,000, apply on-line at this award-winning nonprofit Accion USA.

Soar with the angels

Angel investors are individuals or small groups of investors who are willing to put up their own money to help start-ups.

I recommend: Gathering of Angels introduces entrepreneurs to angels in forums nationwide.

Try the factoring factor

If you have large invoices, try factoring. You sell accounts receivables to a 'factor' for a cash advance - usually between 50 and 80 percent of the invoice. You'll get cash within 48 hours - but you'll pay for it at prime rate plus 2 percent, plus fees between 1 and 3 percent of the amount you're borrowing.

I recommend: Try CIT,the nation's oldest and biggest factoring company. Another is Evergreen Funding Corp. which can process your application in two business days.

Helpful advice for making the most of this Guide

• •  Finance your inventory. Expect a cash advance of 30 to 40 percent of your inventory - but at a cost of prime rate, plus 3 to 4 percent.
• •  Lease equipment and vehicles. Leases are easier to get than bank loans, and skipping big purchases will free up cash.
• •  Take a second mortgage.
• •  Join a credit union which offers more flexible lending standards than banks.