More Entrepreneurs Turn to Personal Loans for Start-Up Money

[Nov 3, 2008.]

 

Many entrepreneurs are finding it tough to find financing to start or grow their businesses. Banks have tightened lending standards, making it difficult to borrow start-up capital. In fact, 65% of lenders have tightened credit to small businesses, according to a Federal Reserve Bank poll. That's an about face from the less stringent lending requirements that many borrowers encountered in recent years.

Charles Edmonds, a Fort Worth business broker told the Star-Telegram: "A year ago, it was hard but not impossible [to get loans]—if you had a good relationship with the bank, repaid loans in the past and your personal expenses were under control. Today, if you had to borrow all of the startup capital, you just can’t unless you had collateral, like a CD in the bank or real estate."

The Star-Telegram featured a business owner who decided to apply for three personal lines of credit in succession and used credit cards and personal savings to raise a total of $108,000 to open a retail store. He had been denied business loans from two banks.

The article doesn't say what his credit score was, but he probably had pretty good credit to get access to those new lines of credit. Many lenders aren't interested in doing business with people who have bad credit, so getting a personal or business loan will likely be out of the question.

So what should you do if you have bad credit and want to finance a business? That will depend upon your overall financial situation and whether or not you can pay back the money. But more entrepreneurs are finding themselves seeking personal loans from friends and family, tapping credit cards, and using existing home equity lines of credit. Another growing trend for obtaining personal loans involves using peer-to-peer lending sites such as Prosper.com and Zopa.com.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.