The latimes.com published a small business makeover plan to help entrepreneurs find affordable financing for expansion plans. The article reported that small business owners in struggling industries like construction and real estate are trying to increase existing credit lines to $100,000 or $200,000 and form joint ventures with larger companies to save face with lenders.

The recent sub prime collapse has stunted credit access for small businesses looking for long-term financing. Banks hesitancy to lend to sectors directly affected by the waning housing market – construction, real estate, mortgage brokerage – has prompted these entrepreneurs to explore alternate financing means. Apart from forming a joint venture or increasing existing credit lines, small businesses can look at leveraging up to 75 percent to 80 percent of their accounts receivables.

For more information on accounts receivables financing or other ways to build business credit read our breakdown of the best business loans according to industry type.

Small businesses suffering from an overly conservative lending market may find are now looking to hedge funds for asset-backed loans, according to a report by www.businessweek.com.

Banks, rattled by the $400 billion loss in bad investments over the past year, have largely cut off lending to small businesses throughout the U.S, forcing entrepreneurs to explore unconventional financing methods. Hedge funds providing asset-backed loans - commercial loans secured by the business’s inventories, equipment, accounts receivables, real estate or other collateral – have become a popular source of credit.

Since the 4th quarter of 2007 lending from 300 asset-based lenders has dropped substantially. Unlike larger corporations, small businesses don’t have large reserves to float the business through tough times. Asset-backed loans from hedge funds generally cost 2 to 3 percentage points higher than the prime rate, require asset appraisal, and may involve physical inspections. Fortunately, the processing time is only a 2 to 3 weeks.

The U.S. Small Business Administration has introduced two new free online courses to help small business owners understand the basic principles of finance and borrowing, according to the SBA’s San Diego District Office monthly newsletter, Newsline.

These courses will help small businesses find out which loan program is suitable for their financing needs and how to prepare loan packages correctly. Small businesses will learn how to avoid common mistakes like selecting the wrong financial package, miscalculating the amount of loan required and underestimating the interest charged on loans.
Read more about the two programs and how to register:

• Finance Primer: Guide to SBA’s Loan Guaranty Programs
• How to Prepare a Loan Package

For more information log on to www.sba.gov/training

The El Paso Times reported last week that the local U.S. Small Business Administration (SBA) and Compass Bank will join hands to offer small business owners loans to El Paso’s entrepreneurial community.

The SBA guarantees 7(a) loans and smaller Express loans for general expansion purposes and 504 loans for real estate or equipment purchases. Loan terms begin at 10 years, and amounts can range anywhere from $5,000 to $10 million.

Small business accounts for over 99 percent of the number of U.S. firms and employs about half of the private sector. This initiative will provide El Paso’s entrepreneurs with new financing options to help them with their working capital needs and expansion plans.

For more information about the partnership, read the full version of the article in the El Paso Times.

Struggling to recover from the multibillion-dollar losses, banks are reducing loans to small business owners. Without a working capital cushion, business owners cancel expansion plans and slashing costs, stunting macroeconomic growth.

The depletion of small business funding sources like commercial and industrial loans and short-term commercial paper applies pressure on entrepreneurs while gas prices rise and home values plummet. In the past, banks lent much more freely, but younger and smaller companies should see credit lines completely dry up over the next few months.

For small businesses with a solid credit history and profitable margins, credit is still available but at a higher rate and a longer approval process.

Additional Resources:

• Learn about alternative financing methods to safeguard your business against financial crisis.
• Find out how to control business expenses and reduce unnecessary expenditure.
• Weigh your financing options and receive one-on-one financial advice, register and fill out a loan application.

According to a report released by the Office of Advocacy, the dollar amount of small business loans between $100,000 and $1million rose by 8 percent and loans less than $100,000, comprising mainly business credit card debt, increased by 9 percent from 2006 to 2007.

The survival and growth of small businesses depend upon easier access to adequate capital for startup and expansion. This data suggests that the number of outstanding small business loans has risen by 15 percent over last year. After relatively stagnant growth in the previous year, the number of micro business loans jumped by 13 percent.

To view the complete report visit www.sba.gov/advo/research/lending.html.

Lately, we have seen more and more banks hesitate to lend to certain industries such as Gas Stations, restaurants, small retail establishments. The turnaround time for processing loans has increased for two reasons: 1. Bank underwriters are reviewing deals more thoroughly. 2. Rate cuts have increased the volume of loan requests. Also, lenders are now requiring businesses to transfer their banking to the Institution as a hidden prerequisite for financing.

Given current market conditions, we expect to see longer processing times and more documentation requirements from lenders. For the next two months small businesses should focus on controlling expenses and building a solid banking relationship. In this market knowing a business banker is more important than knowing a good business bank. On a lighter side,we expect to see the benefits of the economic stimulus and interest rates cuts trickle down to small businesses as soon as banks reorganize and strengthen their balance sheets.

The Office of Advocacy recently published a study that revealed that the majority of small privately owned businesses opt for debt financing over equity financing. The report studied two competing capital structure theories - the “pecking order” theory and the “trade-off” theory.

According to the “pecking order” theory, small companies finance their assets in the following order: internal capital, debt, equity. The “trade-off” theory, however, says that small businesses prefer the tax benefits of deductible interest and therefore, debt financing.

After extensive statistical analysis, the Office found that the “pecking order” theory most adequately describes the capital structure of small privately owned firms. The study also found that generally a firm’s age, size, profitability, liquidity, risk and use of financial services correlates with the business’s leverage ratio (debt divided by equity). Typically, firms that are younger, less profitable, smaller, riskier, less liquid, and/or obtain more financial services from bank or non-bank institutions have higher leverage ratios.

For more information on the study’s findings, refer to theSBA report.

Biz2Credit recently attended the TIE conference in Santa Clara, CA. At the entrepreneurial network and showcasing conference, we spoke with a lot of small business owners, most of which were in the tech sector and most of which were chasing Venture Capital funds to raise money for their businesses.

Though equity financing may seem like the ideal way to finance business expansion plans, all small businesses should seriously consider the road more traveled by. Debt financing can be a vying contender, if not a superior alternative to equity financing. Today’s Venture Capital market looks barren next to the funding spree of the late 1990s and early 2000s that gave VC financing its sexy reputation.

That’s not to say taking out a loan doesn’t have substantial drawbacks for a small business. Debt financing during the credit crunch can be challenging, unpredictable and expensive.

So which one is better – debt or equity financing? It’s a decision that most businesses face early in the life cycle of the company, and it’s not easy. We’ve outlined three essential situations where debt financing can provide quick working capital relief.

Years in Operation

Small businesses more than 18 months old should aggressively apply for an SBA-backed line of credit product. Even amid the credit crunch, banks will accept stated income from small business owners and lend to established companies.

Cash Flow

Small businesses with a strong cash flow can easily qualify for accounts receivables financing. Most entrepreneurs assume that factoring is the only debt option available, however, banks will accept accounts receivables for collateral on a line of credit product – a much cheaper and better alternative.

Owner Equity

Some banks even have a credit program that lends against the owner’s equity contribution. Small business owners that have invested a substantial amount of their own funds or have used angel financing should strongly consider this option.

Read on for more information on how to get the appropriate financing for your small business:

• SBA Loans
• Small Business Financing Alternatives

Most small business borrowers often struggle to identify the best time to refinance. We outlined five common situations where you should refinance and consolidate your small business loans.

Old SBA Loans
Most entrepreneurs use SBA loans to buy a business. Usually, rates of SBA 7a loans are tied to Prime for a 3-year lock in period where pre-payment penalties apply. Loans that do not include real estate normally span 10 years and those with real estate span 20 to 25 years. Those businesses that were purchased in the last 3 years should refinance and lock in a lower interest rate.

Expanding Businesses
SBA loans put an all encompassing lien on a business and impede company growth and financing options. In this situation, business owners should pay the prepayment penalty, take the tax write-off and refinance their debt to improve credit access and company growth opportunities. Growing businesses that were originally purchased with an SBA loan should refinance with a conventional loan.

Land contracts
In this low interest rate environment, businesses that refinance land contract deals with SBA acquisition loans will save around 3 to 4 percent and extend the term of the loan.

Lines of Credit
Businesses operating for over 18 to 24 months can take advantage of the low interest products like unsecured lines of credit. Businesses maintaining good business and personal credit levels will see the most cost advantage.

Leveraging Accounts Receivables
Growing businesses can leverage high accounts receivables to obtain cheaper financing. Normally, banks lend up to 80 percent of a business’s accounts receivables at rates of around Prime plus 2. This can be used to prepay high cost loans received when the business lacked goodwill and strong receivables to qualify for less expensive financing options.

Read more to find out how to refinance and lower business loan payments.