Small business lending growing scarce: Which loan alternative is right for your company?

Ever since the credit crisis began three and a half years ago, small businesses have found it tough to get loans from traditional banks.

Although many of the larger banks claim to be expanding their small business lending programs, the reality is that nine out of 10 loan applications are typically rejected, according to Biz2Credit, and the total number of bank loans to small businesses have fallen 17 percent since October 2011, according to Pepperdine University.

Why aren’t banks lending? It’s a complicated issue, but it generally comes down to the fact that banks haven’t fully recovered since the 2008 financial crisis and many of them wouldn’t be around today were it not for the Troubled Asset Relief Program (TARP). Many of these banks are still exposed to bad U.S. mortgages and risky investments in Europe, which have prevented them from taking on new lending risks.

The big banks know they can’t rely on a second TARP if they end up in difficult financial circumstances again, so they’ve become extremely risk adverse. Small businesses carry a higher risk of default than their corporate counterparts and they aren’t particularly profitable to begin with; as a result, banks are reluctant to expose their books to this type of lending.

This is one part of the liquidity crisis facing small businesses. The other factor at play here is that accounts receivables are taking longer to be satisfied. According to Experian, larger companies now take 28 percent longer to pay their bills.

Until bank lending steps up, small business growth will remain stagnant due to slower cash flow, and that impacts the whole economy. Many economists believe this is adding to the country’s high unemployment, sluggish recovery and declining household net worth.

Small businesses are the engine that drives our economy; they employ half of all private sector employees, generate 65 percent of all new jobs in the country and pay 44 percent of the nation’s private payroll, according to the U.S. Small Business Administration. But without sufficient financing or liquidity, these smaller companies can’t expand their operations, invest in new equipment or fund new research and development. Often, they can’t hire new employees and in many cases have to lay off existing staff.

In this tough economic environment, when large banks are no longer an option, small businesses need to take advantage of alternative financing. Here are seven alternatives to the traditional large bank loan for small businesses:

1. Credit Unions and SBA loans: Small businesses turned down for a bank loan should turn first to local credit unions or the Small Business Administration. According to BizRate, credit union loan approvals have slightly increased compared to their banking counterparts. SBA-backed loans – for example, 7(a), 504, micro loans - are another healthy option if good business credit exists with at least two years of tax returns.

Best for: Any business at least two years old, with good credit rating.

Pro: Reputable lenders, reasonable terms and interest rates.