Microlenders Begin to Replace Banks

Community-based, nonprofit microlending institutions may be a better bet. While many are geared toward low-income borrowers or those in traditionally underserved minority groups, some are active in reinvigorating areas hard hit by the slowing economy. If you can make a strong case that your business will add jobs in your town, or offer a service that will make your community a more attractive place to live, you'll increase your chances of securing a loan.

The Western Massachusetts Enterprise Fund, for example, offers loans of between $5,000 and $300,000 to companies that increase employment or add to the quality of life in the towns it serves. Opportunity Fund, the largest microlender in California, gives loans of between $1,000 to $100,000 to small businesses; thanks to the advisory and support services offered to borrowers, clients have an 85% business survival rate and a loan repayment rate of 90%. Similar institutions are scattered across the U.S., and if you have strong ties in the community, a local institution may be most receptive to your pitch.

If you have a compelling business story, you might even have luck raising funds online. Kiva.org, the website that allows users to lend to entrepreneurs in developing countries, recently set up a pilot program for U.S. businesses. At Prosper.com, a peer-to-peer lending website, would-be borrowers are ranked by creditworthiness and explain why they need a personal loan. While most borrowers are trying to pay off credit card debt or make home repairs, some small-business owners solicit loans there as well. (In the case of Prosper, your credit ranking is crucial: if the site ranks you an "A," you'll pay an interest rate of about 8% on the loan, while "D" borrowers get stuck with a rate of 30%).