Ask an Expert: Credit crunch forces small businesses to be creative

Q: Steve, it is no secret that credit and money are still tight, but what is a secret is where small business should go now. My line of credit has dried up last month and I am at a loss. What are our options? — Michael

A: The good news is that there still are options out there, it's just that if you want to find the money to start or expand your business, you may need to look in new places and be more creative.

The era of 'easy credit' is over, that's for sure.

In fact, according to Senator John Kerry, the chairman of the Senate Committee on Small Business and Entrepreneurship, in a letter to President Bush on this subject, the country's largest source of long-term small business capital, the SBA 7(a) loan program, has fallen by nearly 50% compared with the same period last year.

That's the very bad news.

So what do you do if you need capital for your business right now? Here are some options:

Bank loans: With many large banks now partially owned by the government (say what?!), with so-called toxic loans still on the books, and with the credit crunch not nearly uncrunched, you will find big banks are not the friends to small business that they once were.

But small banks still are, and that's where to go now. Community banks are still making loans. They are still offering lines of credit. They still say yes. Why? There are a few reasons:

• Small regional banks have always been run conservatively, so few have bad loans on the books.

• Many are local institutions, with deep roots and significant assets.

• Regional and community banks have proven to be better lenders, and so still have assets to lend.

Credit unions: Similarly, credit unions may also be a good place to go for a loan right now. Like local banks, credit unions are not exposed to the same risks that big banks are. As such, local credit unions have seen their portfolio of small business loans increase.

SBA loans: Small Business Administration loans have been a traditional source of small business lending, but that is drying up for various reasons: Cut backs by the Bush administration and increased fees have been the most common reasons. To exacerbate things, since SBA loans are, by their very nature, government-backed, and as the government is now busy backing banks with $700 billion elsewhere, things may get even tighter.

I wouldn't expect things to ease up on the SBA front until a new administration takes over in January.

State and local governments:There are no shortage of local government programs and agencies that may offer you financial assistance. For instance, check out local Economic Development Centers.

Credit cards: Credit cards have also been a traditional way for small businesses to fund the dream, and that remains true. However, because far too many small business owners get in over their heads with credit cards, a word of caution is in order. Just don't use them if you can't pay them back.

And if you do use them, be sure to transfer your balances onto the card with the lowest interest rates, and then pay off as much as you can as soon as you can. Using new cards with introductory artificially-low teasers rates is also a good way to keep borrowing costs down.

Other financing: Manufacturers and suppliers might offer a line of credit, or even inventory on consignment. They want to keep your business.

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