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.

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

As banks tighten lending standards, small businesses and startups are running out of capital resources. However, loans guaranteed under the SBA 7(a) program still provide small business owners with access to credit.

There’s a better option for entrepreneurs financing their business ventures with home equity credit lines or personal savings. Through the SBA 7(a) program, lenders will provide up to 80 percent of the project cost if borrowers can foot the remaining 20 percent. Depending on the business plan, viability of the project, current business profile and the borrower’s credit history the lender may take a second lien on real estate owned by the entrepreneur.

For example, a successful limousine business owner wanted to acquire a Coldstone Creamery franchise to diversify across industries. In operation for three years, the business was listed for $400,000. Despite a patchy credit history, the entrepreneur received an SBA 7(a) loan from an SBA Preferred Lender and acquired the business. The entrepreneur only had to cover 25 percent of the project cost personally.

Despite a fragile economy and sluggish capital flow, SBA programs still provide entrepreneurs with valuable financing options and a means to grow their enterprise.