Traditional global credit markets have frozen, and they’re proving difficult to unstick. Under-capitalized banks are not keen to lend out what’s left on their balance sheets—not even and sometimes especially not to each other—and the value of the U.S. currency has risen steeply relative to those of other nations as banks around the world hoard greenbacks to shore up their reserves.

Few consumers are yet being hit hard enough to hurt except those who let the euphoria of easy credit tempt them too far. But the largest danger for the national economy lies in the companies large and small that provide employment, many of which depend upon short-term credit to fund their day-to-day operations.

Corporations that would normally issue commercial paper to finance their capital needs have been disappointed lately, as the market for such short-term debt fell by 11% over the past four weeks, according to the Federal Reserve. Granted this is a volatile data series; however, a fall of U.S. $22 billion in one month is still painful. Research conducted by Greenwich Associates reports that 45% of large corporations and 67% of medium-sized ones have located fewer buyers for their CP, while companies which have been able to sell their debt report that the cost of doing so has risen, in some instances significantly, to further increase the already steepening cost of doing business. Whether the Fed’s plan to bulwark the CP market will bear success remains to be seen.

The Fed’s most recent survey of senior lending officers reported that 65% of domestic banks have raised their lending standards for business loans in all categories, while a recent survey by the National Small Business Association claims that 67% of U.S. small businesses have been affected by the credit crunch, up from 55% in April.

So if the banks aren’t lending, what’s an established small business with the opportunity and desire to expand supposed to do? For that matter, what about the entrepreneur with a great idea? That other “business loan” traditionally employed, the owner’s credit cards, is looking increasingly problematical even if the owner can convince the loan officer to raise the credit limit.

Enter Alternative Financing

Americans are amazingly adept at finding new ways of financing their businesses. Two of the newer methods available are business cash advances and peer-to-peer lending via the Internet.

Unsecured business cash advances drawn on future credit card sales are becoming increasingly popular among small businesses. The funds are generally available within days rather than the weeks required for banks to sort through their paperwork, and because the funds are based on “plastic” sales to be made in the future, not on credit utilized in the past, no credit check is required. Think of them as payday loans for businesses.

Peer-to-peer lending can include loans from friends and relatives but it’s growing fast on the Internet. Of course, angels and venture capitalists have been around for a long time, but for much of that time they’ve limited the amount of exposure they’ve offered to the general business-owning public for fear of an avalanche of funding requests. However, the advent of the Internet has created social networking for entrepreneurs and investors, in the form of bulletin-board websites where those seeking capital can post their business plans and qualifications, and those with capital can locate ideas and teams that interest them.

With the credit crunch freezing traditional funding avenues, one such bulletin board, RaiseCapital.com, reported a “dramatic increase over the last few months” in the number of users on their site. “Both the registered users looking for capital and investors looking for opportunities have increased,” wrote Alyssa Miller, vice president of 5W Public Relations, in an email exchange discussing RaiseCapital.com.

Another online lending service, Angelsoft.com, displayed live statistics indicating 24,478 requests for funding currently submitted, up from 16,030 through the second quarter of 2008, a surge of 52.7%. However, the number of investors only rose from 9,416 to 12,336 in the same time period, a growth rate of 31%.

RaiseCapital.com is a free service, while Angelsoft.com charges a fee to both investors and entrepreneurs to weed out tire-kickers. Even with such entry hurdles to overcome, only 1.32% of all ideas submitted to Angelsoft.com receive funding, but whether that’s an indication of tightness in the market or lack of preparation among the entrepreneurs was not immediately obvious.

Related posts:

1. Credit Crunch Hits Consumer Credit Cards with American Express’ New Policy
2. What’s a Credit Crunch and Why Should We Care?
3. Why Federal Home Loan Banks May Survive the Credit Crisis
4. Why lack of funding failed NCLB
5. Credit Card Reform: Is Abusive Lending the New Normal?