Small businesses are turning to angel investors, suppliers and personal credit cards as the financial crisis spreads to Main Street and access to commercial bank loans becomes more restricted.After being rejected last month at two commercial banks, Education 4 Kids Inc. owner J.M. Ivler is back to financing his 5-year-old online retailer with personal credit cards. "I can't get the banks to give me a loan," complains Mr. Ivler, whose Las Vegas company is profitable and produced $350,000 in sales last year.
Brian Moran, president of magazine publisher Moran Media Group LLC, decided to sell $125,000 in accounts receivables and incur a 3%, 30-day rate on outstanding balances to finance his Paramus, N.J. company after a bank credit line wasn't renewed. The bank told him it was cutting back on small business lending to minimize risk.
It is unclear how many commercial banks aren't writing new small business loans. But reports from across the U.S. suggest that small businesses are chasing alternative financing more vigorously than a few weeks ago.
What money is available can carry high interest rates. Harold Bradley, chief investment officer for the Ewing Marion Kauffman Foundation, an entrepreneurial-research organization, says small businesses with variable-rate loans are "shell-shocked" by the jumping rates on those loans.
Shelly Karras, president of Fordham Financial Services Inc., an alternative financing company in Northbrook, Ill., says he now receives six to seven inquiries a day from banks trying to help customers line up alternative financing, up from just a handful a month last summer.
Mr. Moran had to dip into cash reserves to pay off an $80,000 balance when his local bank declined to renew a $350,000 credit line. Another regional bank turned him down for a $200,000 credit line, citing his personal credit score and the fact that his company didn't have enough assets to secure the line.
Some businesses, meanwhile, are finding sympathetic suppliers will help get them over the financing hump. Jorge Marinez and his two partners went this route after getting turned down by seven banks over eight months.
"No one wanted to qualify us for a business loan," says the 39-year-old Mr. Marinez, who with partners sought a $250,000 loan to open a steak and seafood restaurant in Burr Ridge, Ill. "They kind of complained to us that the way the economy is going right now, the banks don't want to take a risk in the restaurant business."
Mr. Marinez approached the property's landlord, who agreed to finance the endeavor last month. The landlord was also getting hit hard by the economy and wasn't finding any other renters for the site, Mr. Marinez says.
He hopes to open the restaurant, called Porterhouse, in late November.
By: Kely Spors and Raymund Flandez
Wall Street Journal; October 2, 2008
