Beyond Dad and MasterCard

I am back from a vacation in beautiful Sweden and ready to get back to work!

Awhile ago, I promised to share resources for crafty entrepreneurs looking for loans to grow their business. Outside of credit cards and family and friends, what can an etsy seller or other small business person do to find financing?

1. Banks. Okay, duh. I mention the obvious because, if you qualify for a small business loan from a bank, you are likely to get a lower interest rate than you will from other sources. You can also have the flexibility of a line of credit, which functions like a personal credit card -- unlimited borrowing up to a given credit limit -- but with a much lower interest rate. It's definitely an option worth exploring. Many community organizations offer free classes to help you put together a business plan and otherwise navigate the process of filling out a loan application.

2. Friends and family, formalized. A new crop of web-based businesses match borrowers and lenders while sidestepping traditional banks. Sites like Virgin Money allow you to tap resources from the people you know. You can set an interest rate from 0% (you borrow $1000 from Aunt Mabel, and pay her back $1000) to whatever interest rate the borrower and seller negotiate. What value does the website offer? Virgin Money and its competitors handle legal and tax documentation for the loan and electronically transfer the funds.

The greatest value these sites provide is that they do the ugly work of making sure loans get repaid. Today, many grandparents earn 3% interest on their CDs while their responsible grandkids pay 9% on a car loan. It doesn't make a lot of sense. Wouldn't it be better if grandparents made the loan so a better interest rate for both parties (say, 6%) could be negotiated? The reason this doesn't happen in real life is that it's difficult for the average person to structure a legal contract, and not always socially appropriate to do so -- which makes the loan a big risk for lenders. Sites like this are basically stepping up to be the bad guy, if necessary. This is an exciting development for eliminating missed opportunities among family and friends.

3. Loans from strangers. In addition to sites that connect you with friends and family, many other sites will connect you with strangers as a source of loans. These are known as "person to person" lending sites. Prominent lending sites include Prosper and Zopa. These sites allow you to post a profile describing how you will use the money and some information on your credit history. These profiles are anonymous and visible to anyone. Strangers (as well as family and friends, if you like) bid on the loans in a eBay type of auction. People can contribute anywhere from $50 to the full amount you request.

It's a brand-new market that's gained a fair amount of steam. Prosper alone has funded over 20,000 loans to date with a total value of $137.3 million dollars.

And on the crafty front, my girl Willo, an illustrator and web designer who makes the cutest onesies I've ever seen, shared a link to a crafters group on Prosper. It seems that this group hasn't seen any loans among the members yet. It's an interesting glimpse though at a way craft lovers can lend to crafty business owners.

From standard to Web 2.0 sources of loans, I think these are all valid options to explore for anyone seeking a small business loan. If you try one, let me know how it works!