It is difficult to get small business funding in the middle of a recession but credit unions may offer some help. Sam Thacker, an expert on small business lending from Austin, Texas provides some great insights in a great article which compares the benefits and limitations of getting a load from a credit union or a bank.
The game changer came in 1998 when, according to Thacker, Congress passed the Credit Union Membership Access Act of 1998. Credit unions typically offer fewer and smaller scale loans than local banks and depending on what geography your business operates, will determine whether a local bank or a credit union is your best bet for getting small business funding.
The local banks typically will only loan to small businesses without a long track record if the bank is part of the SBA loan guarantee program. Not all local banks are.
What happens is, first find out if your local bank is a member of this program. You apply for a loan from the bank as you would any other loan.
The difference is, the bank will be more predisposed to lend money on newer, less proven businesses since the SBA guarantees payback to the bank if your business fails.
This guarantee by the SBA is not without strings. You may still have to pledge collateral or prove free cash flow is being generated by your company.
This was how Bedazzled, Inc., my first company was financed. We paid a seven year loan back in eighteen months, so the SBA got a great return on investment from Bedazzled!
We applied for the loan when we had gotten a large order from a high-profile mail house that gave us over $200,000 in revenues in one shot. That order was the guarantee to the bank that we were in business for real.
We didn’t go to the bank with just an idea. We had real revenues. We had real cash flows. We could prove our business case.
You should read this article on comparing how loands from credit unions work and how they differ from local banks. You’ll become a lot smarter when doing your due diligence before you apply for a small business loan.
You’ll ask better questions and be prepared for the limitations you’ll face. Credit unions are typically best for loans of $50,000 or less.
I was impressed with Mr. Thacker’s thoroughness and knowledge, especially when it came to understanding how the 1998 legislation affected lending for small businesses.