Borrowing Money: New and Existing Funding Sources for SMBs

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Small business borrowing adds up to around $1 trillion, according to the most recent research from the U.S. Small Business Administration (SBA). While friends, family and banks have been the most likely sources of lending for most small firms, bank lending is becoming more constrained, and research has indicated that there’s a large and growing finance gap for small and medium-sized enterprises.


According to a study released at the end of January from the American Sustainable Business Council, Small Business Majority and Main Street Alliance, 61 percent of small-business owners say it’s harder to get loans now than it was four years ago. However, given 2011 small business lending figures from the nation’s four largest banks – which showed many small businesses were getting funding, the definition of “small business” seems to have changed, and that could be one part of the problem.


Bank of America, Chase, Citibank and Wells Fargo define small businesses as those that have annual revenues of up to $20 million. That’s a heck of a revenue stream for a “small” business. Consider that the average amount of median startup capital for new small businesses is about $50,000, according to the most recent SBA figures (2010). The SBA has also defined two size standards for SMBs: 500 employees or less for most manufacturing and mining industries and $7 million in average annual receipts for most nonmanufacturing industries. That’s far below the “standards” set by big banks for small loans.


Looking at alternatives

There is good news on the horizon, however. Despite declining figures, banks are still lending money to SMBs. But the better news is that there has been a proliferation of alternative finance options that may prove helpful options for some SMBs.


For example, the U.S. government approved the American JOBS Act (Jumpstart Our Business
Startups) in 2011 – which is looking at concepts like “crowdfunding” for SMBs. We’ve all heard of “crowdsourcing” in reference to social media – i.e. the practice of social listening and asking our contacts on social and professional networks for advice on particular business challenges or questions.


Crowdfunding is similar – except that businesses ask for investors in their business, raising money online. In the case of GoFundMe, one of the first such sites, supporters are only charged if the business reaches the goal by the deadline the business owner sets.


Technology innovations for SMB funding

Financial technology is also starting to play more of a role on the unconventional business lending stage. Innovations in this area – like opening up financing for non-accredited investors such as the recent entry of Amazon and Groupon to this arena, for example – could turn the world of banking and business finance on its ear.


Either way, moves like these can give fledgling businesses many more opportunities to be successful, without worrying about where the money will come from to do so. After all, if there’s one industry that could use some revamping, it’s the world of banking.

Remember when real estate was all about reams of paper? Now think about the last time you had to sign a ream of paper before getting to the closing table. There’s no doubt that the combination of technology (like online signatures, for example) and consumer/business demands (less paper, please) have streamlined the way we buy and sell property.

Given the inefficiencies in the banking industry – both in general and specific to SMB lending – it’s likely that the financial world is next in line for a makeover. These new funding sources are a start in the right direction – and that’s good for all of us.


Your Turn: What has been your experience with small business lending? What are your best tips and recommendations for other SMBs trying to get funding? Let us know!

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