Alternative lenders may offer more.

Central Ohio's economy is kicking into high gear, with the Great Recession far off in the rearview mirror. But that doesn't mean the Columbus region's smallest companies are getting their hands on enough cash to fund growth. Despite a nearly decade-long economic recovery, it's still difficult for many startups and small businesses to secure financing—especially from traditional banks.

Sure, it's always been harder for young or riskier organizations to score loans—but not as hard as it's been lately. Even though overall commercial lending has more than fully recovered since the fiscal crisis, small business lending remains below a 2008 peak, according to the U.S. Small Business Administration, which counts commercial loans of under $1 million to be small business loans. Credit unions and big banks are only approving about 40 percent and 25 percent of loan applications, respectively. Small banks are approving a friendlier-but-still-restrictive 49 percent.

After exhausting those options, many businesses will inevitably turn to alternative lenders, which are approving nearly 57 percent of loans, according to the SBA, albeit usually at higher interest rates and with stricter terms. It's clear entrepreneurs and small business owners can't hold their breath waiting for a groundswell of cash from traditional banks eager to take on risky loans.

“Banks will always be there, but there's not a lot of wiggle room,” says Jerome Jones, a business consultant with the Small Business Development Center at Columbus State Community College. “They're risk-averse. Taking a lot of risk is not what a bank likes to do.” Fortunately for central Ohio's small businesses, there are a host of other options to fill the void where traditional banks and credit unions may not venture.

Alternative Options

Alternative lenders come in a variety of forms. There are government entities—SBA, cities, counties and states—looking to spur economic development. There are nonprofit and peer-to-peer lending platforms. Some startups may even opt to eschew loans and pursue crowdfunding through Kickstarter or another service.

For business owners rejected by traditional lenders, Jones and the Small Business Development Center are there to help find another path. The public-private partnership is supported by the SBA, the city of Columbus, the Ohio Development Services Agency and Columbus State Community College, among other partners. This route means not just financing but business training and financial literacy lessons, among other services meant to boost the likelihood of success beyond the loan. “We get a lot [of businesses] on the front end,” Jones says. “They don't know where to start. They don't know what they don't know.”

The Small Business Development Center, although itself not a lending institution, will help businesses crunch the numbers for financial projections and ultimately can identify the financial resource that best fits a particular business. The organization maintains relationships with most financial institutions in the Columbus area and many non-traditional lenders.

The Economic & Community Development Institute takes referrals from banks that cannot take a particular deal but still want to preserve a depositor relationship. It's a win-win, says CEO Inna Kinney.

Despite the economic recovery, “we're still seeing a lot of referrals,” Kinney says. “I still believe that there's a huge space for organizations like ECDI to assist those individuals, especially startups.”

ECDI, a nonprofit microlender, provides training, technical assistance and access to capital, all with the goal of creating self-sufficiency well after the term of a loan—usually 60 months (at an average of about 8.5 percent interest). The average loan is about $24,000 and about 65 percent of borrowers are new businesses, Kinney says.

Unlike traditional loans, there's no prepayment penalty. “That's another advantage,” Kinney says.

More than Money

Many alternative lenders, whether government groups or nonprofits, are mission-driven. “We can overlook credit scores, especially if it has to do with medical—sometimes we'll discount that,” Kinney says.

Another nonprofit lender, the Finance Fund, has a variety of loan programs that target specific social niches, such as one supporting grocers bringing healthy food to underserved communities.

Kiva, a nonprofit peer-to-peer lender based in San Francisco, which arrived in Columbus in July 2016, is extreme in its altruism: “At Kiva, we envision a world where someone's creditworthiness is determined by the strength of their character rather than their credit history,” it says on its website. “We're working to re-insert human relationships into the financial system by using social underwriting to assess the creditworthiness of our borrowers.”

For Kiva, loans are secured first by borrowers proving that their families and friends will support efforts with their own money. In less than two years in Columbus, Kiva has helped fund 75 businesses across Ohio with $369,000 in loans, many of the deals for only a couple thousand dollars.

“Personal credit weighs very heavily; that's one of the legs of the stools that needs to be corrected,” says Lily Vail, Kiva Columbus lead. “And a solid business plan. You're taking a big leap of faith. You want to know someone has done their homework and projections.”

Similarly, ECDI requires a business plan and training for financial literacy, among other skills.

That comes with the territory for eager business owners. “There are certain things we require from them,” Kinney says. “It's not merely credit score or collateral; it's about clients' willingness to learn.”

Evan Weese is a freelance writer.