Just about everywhere you turn today, the topic of small business funding comes up. The National Federation of Independent Business (NFIB) has recently reported that the number of government backed SBA 7(a) loans have significantly dropped during the recession. In fact, only 41% of businesses obtained financing from all different sources while 16% were unable to get or didn’t ask for any credit.
You just can’t help wondering how so many businesses endured the recession when they couldn’t get any credit. But don’t be deceived by the numbers. Many of the 59% of businesses that didn’t get credit from traditional lending sources did get money. Their money came from angel investors and equity partners and others. There are plenty of businesses that could qualify for this type of funding too, but they don’t know how to ask for it.
Working Around Marketplace Inefficiencies
The money markets are inefficient in that borrowers and lenders can’t always find each other in a way that maximizes funding. That is why there is a marketplace that is made up of private funders who are willing to lend capital to businesses. These lenders offering business funding go right to the source making it more efficient for borrowers to find investors and lenders to find borrowers. Because traditional funding sources are making it so difficult to match lenders and borrowers, it is perfect conditions for a private business funding market.
It’s a fact the small businesses were responsible for creating 64% of new jobs over the past 15 years. That is astonishing and makes you wonder why traditional lenders like banks would cut off credit like they have. You would think they would insure businesses have access to funding, yet it’s known that trillions of dollars are just sitting in corporate accounts and on bank balance sheets.
The fact is that the conditions are ripe for private lenders to step up to the plate. The private lenders know there is an opportunity to offer capital to businesses and it’s a win-win situation. The lenders can offer business loans, venture capital or startup funding and earn an excellent return on their investments. The businesses get the money they need.
In fact, the private business funding market offers a greater variety of funding options. The big financial companies and banks aren’t lending so it’s left up to the free enterprise markets to provide the capital in other ways. There is a busy marketplace made up of private capital lenders and borrowers that include venture capital and startup funding. Those are two of the most difficult categories to fund. You can find angel investors, business loans and even equity partners.
Do You Know How?
One of the questions often asked is this: if there is funding available then why aren’t more businesses tapping into it? The answer lies more in borrower attitudes and lack of knowledge about the private lending markets.
· Don’t know the investors exist
· Don’t know how to prepare a quality business plan
· Don’t understand the size of the private market
· Don’t want to ask after being turned down so many times by large banks
· Don’t want to pay exorbitant loan fees charged to riskier enterprises
The thought of asking for money from equity partners or requesting venture capital is too intimidating for new businesses searching for startup funding. Let’s face it – going from bank to bank only to be turned down is demoralizing.
Using a central point for matching borrowers and lenders makes sense in many ways. It is an efficient market because of centralization. It a cost effective market because you don’t have to travel around the country searching for opportunities. But most of all, it offers funding solutions for businesses that are ready to startup or expand and that is good for the economy.