May 5, 2014
Experts Corner

Alternative lenders provide entrepreneurs options

Anthony Price

Capital is fuel for America's small business engine leading to job creation, economic growth, and prosperity. Right now in Connecticut, a restaurant owner is contemplating renovating her dining room, an auto repair shop needs new equipment, and an immigrant dreams of opening a store.

Each needs capital.

Since the Great Recession, small businesses accounted for 67 percent of net new jobs. The U.S. Small Business Administration (SBA) defines a small business as having fewer than 500 employees, which includes 99.7 percent of U.S. employer firms. The SBA Office of Advocacy reports that 27.9 million small businesses exist in the U.S.

However, the U.S. Census Bureau's County Business patterns show that there were only 7.4 million active employer entities in March 2009, with 50 percent of these firms employing fewer than five employees and 33 percent employing five to 19 employees.

Small business lending is a $1 trillion industry, but bank consolidation has led to a changing landscape. From a peak of 18,000 banks, only 6,891 federally insured institutions remain in the U.S. Today there are fewer than 7,000 banks for the first time since 1934.

Higher underwriting standards and a decline in real estate values have conspired to make it difficult to access capital. Further exasperating matters is the axiom that it costs the same to underwrite a $50,000 loan as it does a $5 million loan.

When banks slammed on the brakes to stop lending during the recession, alternative lenders hit the gas pedal to fill the cataclysmic void. While banks still dominate lending in dollars and overall volume of loans to small businesses, they are no longer the only game in town.

Today there's a cornucopia of alternative options from peer-to-peer lenders to merchant cash advances, equipment and purchase order financing, accounts receivable factoring, and crowdfunding platforms. These options tend to offer quick approvals and often do not require collateral or a high credit score, although they are more expensive than a bank loan, with higher interest rates and shorter payback periods.

OnDeck Capital, an Internet company in New York City, is part of this new breed of lenders. Since opening in 2007, the company has loaned more than $900 million to more than 20,000 businesses. The firm's loans range from $5,000 to $250,000, with payback terms lasting up to 24 months. The annual percentage rates range from 19.99 to 39.99 percent, which includes an origination fee of 2.5 percent. These loans are not cheap, but they represent a viable option.

Lenders come in different forms. HEDCO, a Hartford-based nonprofit, lends to underserved entrepreneurs throughout Connecticut. The organization has been around since 1975, with the mission to make capital accessible to underserved people and communities. In addition to lending, HEDCO provides technical assistance, a business incubator, training, and other services.

A recent success story is Julian Sawyer, an affable expat from the Bahamas, who opened Boru's Bar & Grill with his two partners in Waterbury in 2004. After a successful run, Sawyer had the urge to open a new bar in Torrington, which he felt was an underserved market.

But after 16 years in the restaurant and bar business, he wanted to execute his vision alone. In 2011, Sawyer found a suitable location to create a modern and hip Irish bar with great food. The location in downtown Torrington had been vacant for years.

After a year of countless Home Depot trips as well as long days and nights of sweat equity, he was out of cash. Sawyer said, "I came up short of what I actually needed to make the finished product look presentable to the public." He needed $20,000 to get the bar over the finish line.

HEDCO, an SBA intermediary, felt success was likely and approved an SBA microloan in April 2012. By September 2012, Sawyer's in Torrington was open. Acknowledging the protracted time he took to open the business, Sawyer said, "there was a learning curve because I did it all myself." Sawyer's employs five people and is a powerful example of what patient capital can do to invigorate a community.

Anthony Price is a senior business development officer at HEDCO.

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