Breaking the bank: non-bank lenders are pulling ahead in small-business financing. Here's what the playing field looks like

Entrepreneur, March, 1998 by Cynthia E. Griffin

In contrast, Citizen Equity Federal Credit Union (CEFCU) in Peoria, Illinois, takes a more traditional approach to business lending in the nine-county region it serves. In addition to offering secured loans, it provides letters of credit, offers revolving lines of credit and is an SBA lender.

While CEFCU's loan requirements don't differ from a bank's, their local ownership and decision-making ability give them a better understanding of the community and its economics, maintains Gil A. Johnson, CEFCU business loan manager.

Even more important, Johnson says credit unions can more easily and quickly respond to the needs of their constituents. CEFCU is a perfect example. The institution began lending to small businesses in 1994 because of requests from members.

DON'T STOP THERE

Although finance companies and credit unions are obvious sources of small-business capital, there are other places to look. Have you considered your life insurance policy or credit card company lately?

"You can take a loan against your life insurance policy if it's a permanent policy," says Virginia Bueno of the American Council of Life Insurance. Insurance companies will lend up to the cash value of the policy minus interest.

Permanent policies have a cash value feature, and the best part about these "loans" is that they don't have to be paid back. They're also easy to obtain, can be used for any purpose and have competitive interest rates.

But there's a downside, cautions Bueno: "If you tap into the cash value of your policy, it's going to affect your death benefits. It lowers the benefit [paid to your heirs] by the proceeds of your loan."

If you're an American Express Small Business Services card holder, you may be eligible for a pre-approved, unsecured line of credit of up to $50,000 from the company. It's accessible by check and can be used for any purpose. Entrepreneurs may contact American Express to apply for the credit line. The company also offers equipment leasing up to $25,000 for card holders and noncard holders alike, as well as auto leasing financing up to $40,000 for card holders only.

Another good source of financing to consider is your suppliers. "If they can get credit and you can't, they may be willing to give you credit because of the profit they're making on the products sold to you," says Sihler. He adds that there is typically a cost for this credit, and the supplier could use the equipment you are purchasing as collateral.

HOME COURT ADVANTAGE

Although many business advisors don't recommend it, some entrepreneurs look closer to home for financing by taking a second mortgage on their house.

Mortgages are, of course, mainstays of many banks. But according to G. Richard Bright, senior vice president of home equity lending for Countrywide Home Loans in Calabasas, California, many mortgage companies will also make these typically 15-year home equity loans.

Second mortgages are best for people who want to borrow all the money they need at one time and secure fixed, equal payments. A home equity line of credit, on the other hand, is a revolving credit agreement with a fixed credit line in which the borrower can write checks up to that limit, says Bright. Interest rates are higher, but this option offers more flexibility. While plenty of companies offer second mortgages, few offer the home equity line of credit.