When banks say no

Scott Metzger wanted to start a restaurant-microbrewery in San Antonio, Texas. His credit was good. His business plan was sound. He should have had an easy time getting financing.

He didn't. After spending a year developing relationships with three large banks, he was abruptly denied in December.

The state of the national economy had soured, the banks told Metzger, and they were tightening loan standards companywide in an effort to lower risk.

Left on the hook for thousands of dollars, he turned to his credit union, a nonprofit lending cooperative. His loans were approved within two weeks, and his brewery is set to open in October.

These days, small-business owners such as Metzger have to be creative about getting the money to start and expand their companies. Many are turning to nontraditional sources, such as credit unions. Increasing numbers are going to online-lending Web sites, which cut out the traditional bank middleman, and to factoring companies, which buy companies' future revenues.

Factoring is enjoying a cyclical upturn that it often sees during economic downturns, while credit unions and online social lenders hope the uptick in their small-business-lending volume survives even after banks' lending returns to normal.

But some of these alternative finance sources are more expensive than a traditional bank loan, or brand-new and largely untested.

Even as the Small Business Administration's main loan program gave out 17.6 percent fewer loans by early April than in the same period last year, online-lending auction site Prosper.com has seen a big jump in high-quality borrowers and loan volume. At the end of 2007, 43 percent of Prosper Marketplace Inc.'s borrowers had credit scores of 720 and above, up from 25 percent in December 2006.

Credit-scoring agencies such as Experian P.L.C., which Prosper uses, assign scores based on a consumer's bill-paying history, debt, and other data to determine how likely an applicant is to repay a loan in time; a prospect with a score of 720 is considered a prime borrower.

Prosper lent $81 million last year in an eBay-style marketplace, and it expects to beat that number in 2008. Would-be borrowers choose their interest rate, which averages 7.8 percent to 15.6 percent for those with good credit. That is roughly comparable to the rates on unsecured loans for small businesses offered by Wells Fargo & Co. on its Web site and, chief executive officer Chris Larsen said, much cheaper than rates on business credit cards.

At least four Web social lenders have joined the marketplace in the last 12 months: Zopa Inc., GlobeFunder Ventures Inc., Virgin Money USA and Lending Club.

"There's been an enormous market of underserved customers that these new products reach," said Mitch Jacobs, chief executive of On Deck Capital Inc., an online lender.

Peer-to-peer lenders such as Prosper and Lending Club match lenders and borrowers, while Zopa, an online social-finance source, is backed by partner credit unions, from which borrowers may pick a lender. Investors on Zopa then can help out a borrower by buying a certificate of deposit linked to the borrower's profile, reducing his monthly repayment.

Online Banking Report estimates that loans given out by peer-to-peer online lenders such as Prosper could grow to as much as $3 billion in 2012 from $86 million in 2007. That number is still only a small fraction of the $14.3 billion guaranteed by the SBA in its 2007 fiscal year - but SBA loans have been contracting for three years.

Jennifer Hogan, a self-employed photographer, needed to borrow $20,000 to publicize her company in the San Francisco Bay area. She was rejected by Capital One Financial Corp., and she could not afford a preapproved Wells Fargo & Co. credit line or credit card. She applied to Zopa and had her money a week later.

Most of the major sites' loans top out at $25,000.

Like Metzger, the microbrewer, others seeking heftier financing turn to credit unions, lending cooperatives that are not traditionally associated with business lending. Most of the credit unions that make business loans today began to do so during the last 15 years as they were granted community charters, allowing them to serve a geographic area rather than a single company's employees or a professional association.

Factors' fees, which also can cover bookkeeping and debt-collection services, range from 2 percent to 5 percent of receivables at newer factoring companies to under 1 percent for a traditional factor dealing in multimillion-dollar funding.

"If you're a company that can't get credit otherwise, then expensive money is better than no money," said Greg Udell, a finance professor at Indiana University.