Finagling financing in credit-starved times
By Jenny C. McCune • Bankrate.com

Interest rates are low, but many small companies find themselves shut out of traditional forms of financing right now. Banks have beefed up loan requirements. So have venture capitalists, who are demanding that a company they back will provide a real return.

So where's a small business or a startup supposed to go when it needs money to grow?

The best financing route may be a detour off the beaten path. Here are a dozen exits to alternative funding destinations:

1. It's better with barter. Don't have cash on hand for expenditures? Exchange your company's goods and services for things it needs. "Barter can be a great way to get what you need when you don't have the cash to pay for it," says David Brophy, associate professor of finance at the University of Michigan in Ann Arbor.

An accounting firm startup can exchange bookkeeping services for help from a lawyer in reviewing incorporation papers or from a publicist in getting the word out about the new business. Swap with local companies as needs arise or join a more formal arrangement. Barter networks can be found on the Web and include Barter Business Unlimited, Barteritonline.com and Itex.com.

2. Ask your employees for help. "People want jobs. They'll be willing to help you," says Brophy. Employees may invest in your company in exchange for equity. Or they may exchange a lower salary today for a higher return tomorrow when your company takes off. The important thing is to get such transactions in writing and have a lawyer review them so that any agreements are square and fair.

3. Look for an angel. Angels are private investors who will put money in your company and may or may not want to help run the show. The chances of landing an angel are mixed. Since the stock market isn't producing the returns it once did, many private investors are looking for alternatives. However, a lot of angels lost their shirts (and wings) in the stock market and don't have funds to invest in any company, regardless of the opportunity it represents.

If you're interested in pursuing the angel angle, a good place to start is the Angel Capital Electronic Network, or ACE-Net, an electronic angel network started in part by the Small Business Administration. Bankrate also maintains a directory of angel investors and venture capitalists. Locally, ask the business professionals you work with -- your lawyer, accountant, fellow business owners -- for suggestions.

4. Seek supplier-side financing. Suppliers get their money from selling you goods, materials and services so they want your business to succeed. If your suppliers are well-heeled, ask them for lengthy payment terms. Some may be willing to delay receipt of payment until you get paid by your customers. In addition, if suppliers believe in your company, they may be willing to act as investors in return for equity or lend your company money.

5. Get funding from family and friends. It's hard asking relatives to invest in your business. It's also something that you should think long and hard about. After all, if your company goes belly-up, there goes Aunt Jane's nest egg. Even if things go well, borrowing from those in your personal circle can be problematic. If your company does take off, it will require additional financing that your family and friends might not be able to supply. Then you'll have to approach other investors. If they invest, that will dilute your relatives' stake in your company and make it worth less. So it's best to think twice before asking relatives and friends for a check, says professor Brophy.

6. Parlay your plastic. Using a credit card may not sound like high finance, but it does have some advantages. As Doreen Amano, vice president of global development for MasterCard International in Purchase, N.Y., points out, credit card financing requires less red tape than landing a loan. Credit card funds also aren't guaranteed by assets. And while credit cards may charge higher interest rates than a traditional bank loan "when you factor in fees and surcharges [for loans], credit cards are price-competitive," Amano says.

Credit cards particularly shine in the role of gap financing. Take Smarter Living, a Web-based travel publisher. Its clients are "reliable but slower payers of their invoices," says Daniel Saul, president of Smarter Living. So the company pays by credit card when its bills are due and then pays off the balance when it gets paid by customers. "We pay off all our credit cards in-full each month, which allows us to basically extend when our bills are due by 20 to 50 days," Saul says. "I've been surprised by who will accept credit cards, everyone from our law firm to a cubicle vendor."

If your company goes this route, be sure to evaluate several card issuers. You can start by checking Bankrate's latest data on corporate cards. Even after you find one that's appealing, consider further negotiating the interest rate and terms. Right now, says Amano, the credit card game is very competitive, so you may be able to land a better deal.

7. Keep your day job. The cheapest way to start a business is to do it in your spare time. Keep your regular job and you'll have steady income coming in. That will take the pressure off your new business. The downside of moonlighting: Your fledgling venture won't receive as much nurturing as it would if it were a full-time venture. It will grow more slowly, but at least keeping your day job will give it an opportunity to sink or swim.

8. Bootstrap your company. Use smarts instead of money to start a business. By bootstrapping, you find ways to frugally launch a business so that it requires little or no advanced financing. For example, start your company in your home to keep overhead costs low. Prioritize what you need to do, says Nancy Michaels, president of Impression Impact, a marketing consulting firm based in Concord, Mass. That may mean instead of paying for the design and printing of a brochure, start with a company Web site since you know HTML and have a friend who's willing to rent you server space on the cheap. Bootstrapping can also mean getting free publicity vs. paying for expensive print advertising. It's finding ways to get by and to do more with less money, Michaels says.

9. Explore customer financing. Customers who believe in your company can pay you in advance, in essence bankrolling the work that you do for them. You also can request a certain percentage upfront and then the remaining payment upon completion of work. Customers may also be willing to invest in your business in return for equity.

10. Search for specialty lenders. Loan funds are available for minorities, women and other special interests. For example, the Community Development Corporation of Long Island Inc. is a nonprofit lender. It's also an authorized Small Business Administration microlender. Through its Second Look program, CDCLI works with banks to lend money to small businesses that were originally rejected for loans by the banks. "We go to the banks and say we'd like to offer our loan services to customers you've declined," says Trevor Davis, CDCLI's senior vice president and lending officer.

How to find a community development corporation in your neighborhood? Davis recommends networking. Ask your local Chamber of Commerce, small business development center and other local businesses and business associations. Also visit the SBA's Web site for hints on how to find lenders or lending programs that might work for your company.

11. Get a new (equipment) lease on life. Leasing is more expensive than buying outright, but it can be a way to finance new capital equipment when money is tight. It also carries a tax advantage: The Internal Revenue Service considers a lease a tax-deductible overhead expense. Charles McCabe, president of Peoples Income Tax Inc. of Richmond, Va., has occasionally used leasing, but he says to be careful. "Often the monthly charge isn't really what you'll ultimately be paying," the tax preparer says. "Be sure to do your arithmetic to find the true cost before you sign a lease."

For more information on leasing, visit the information portal of the Equipment Leasing Association.

12. Have fun with factoring. Companies with existing accounts receivable can use factoring as a way to raise cash. A factor buys your invoices for cash, anywhere between 50 percent and 80 percent of the value of your invoices. You get cash upfront while the factor collects on your accounts receivables. The factor then gives you the remainder owed, less a fee for his services. That fee can range from 1 percent to 5 percent and depends on how difficult it is for the factor to collect, the volume of the accounts receivable and the number of invoices.

Which of these alternative-financing options will work for you? Maybe one, maybe a couple. But take a long look at all of them since, in today's economy, "even the best company can still get a cold shoulder," says Brian Goncher, general partner for Crystal Ventures, a venture capital firm based in Cleveland, Ohio.

Heat up your company's financing chances by exploring all opportunities, including offbeat ones, and being persistent in your quest.

Jenny C. McCune is a contributing editor based in Montana.

-- Updated: June 19, 2003