8 Places to Get Financing for Your Business

Wall Street's growing crisis has led banks to clamp down on lending, depriving many entrepreneurs of the financing they need. Small businesses seeking expansion capital have to wait months for a decision - and often, a "yes" brings with it ridiculously onerous loan terms.

"Unless you have a personal credit score higher than a 690, and a perfect business credit score ... it's probably not going to work with the banks right now," says business coach Leili McKinley. "Don't waste your time unless you want to practice your pitch. Alternate funding will probably be your best chance at capitalization."

We took a look at 8 alternative sources business owners can tap for cash.

Credit unions

Pros: The ownership structure at credit unions is such that those with an account actually own a part of the institution, so credit unions see you as a member, instead of a number.

Cons: Though credit unions were established to provide credit at reasonable rates, experts say the rates vary widely, and that credit unions can be as cautious as banks. "Credit unions are relatively new in the corporate lending field," says Tom Lowles, director of Portland Community College's Small Business Development Center. "I don't see them as a big player."

Microlenders

Pros: Microlenders can be an alternative for those with imperfect credit. Though most loan less than $5,000 per person, others have been known to hand out as much as $25,000.

"They are typically more flexible with the loan terms and what they will accept as collateral," Lowles says. One of the largest microlenders is Accion Texas, but government programs can help, too, depending on the project. AmeriCorps, for example, loans small amounts to companies that work in disaster areas.

Cons: They're hard to find and they don't give much. "Microlending is limited in the USA compared to other countries," says John Arensmeyer, executive director of the Small Business Majority, a small-business lobbying organization.

Furthermore, microlenders often take just as long to evaluate your business as banks do. "They usually took 15 to 30 days, but in this economy it's 45 to 60 days," says Cynthia Nevels of the North Dallas Small Business Development Center. "Like at other institutions, resources are scarce."

"Social lending" businesses such as Propser and Lending Club are looking to fill that gap, directly connecting potential borrowers to individuals with cash to lend. Such services can bring in quick cash, but the riskier the loan, the higher the interest rate will be.

Friends and family

Pros: With a review process that may be as simple as a phone call, the F's are often the most enticing option. "It's usually a minimally documented transaction without any lawyer fees, says Eric Siegel, a lecturer with the Wharton Entrepreneurial Programs. "It's a fast, low-cost benefactor relationship with Uncle Harry who has a lot of money and just wants to help you out."

Cons: Not being able to look Uncle Harry in the eye come Thanksgiving because your business went bust. "There's definitely a psychological cost," Siegel says. "You'll feel much worse about losing their money than a bank's money."

One option: Virgin Money launched in the U.S. late last year with a system to formalize loans between friends and family. Making the loan official may help reduce awkwardness.

Factoring

Factoring is the practice of selling your accounts receivables to a factoring company, which will quickly give you a percentage of the money and then, later, collect the full amount due from you or your customer. Factoring companies make their profit on the fees they charge for their services, which start at around 1.5% of the financed receivables.

Most factoring companies don't insure against non-payment. If your customer defaults, you have to pay back the money you've been advanced.

Pros: "[Factoring] gives you instant cash, thus stabilizing your cash flow while reducing overhead," says business coach McKinley. "It also relieves your accounts receivables department from having to grant credit or risk larger invoices with clients." The International Factoring Association (IFA) can help you find a factoring firm that meets your business needs.

Cons: "It can be very expensive," says Arensmeyer. The factoring company will take a cut of your invoice, which will cut into your profitability.

Also, you will no longer be able to use your accounts receivables as collateral or security for a loan. "Before considering this, I'd look to your balance sheet," Siegel says. "Look at your accounts receivables and if you've been undisciplined in collecting money, try to be timelier."

Venture capitalists

Pros: They've got a lot of money. Like bankers, venture capitalists aren't handing out money from their own wallets, so you can seek much larger amounts that you would get from a bank loan - if you can find a VC firm that specializes in your industry.

Cons: It could be a waste of time. VCs take only a handful of promising companies and will scrutinize your venture as thoroughly as banks will.

"Time for a sanity check," Siegel says. "Not everyone is a viable VC prospect. You're looking at some very expensive capital. They deal with higher-risk ventures, and so they deserve a higher reward." Be prepared to surrender partial ownership of your company if you score a deal.

Angels

Pros: Angel investors are wealthy individuals who invest at the very early stages of promising ventures. The typical angel is a business owner, so you can also get expertise and human capital from the deal.

"It's almost like the 3Fs [friends, family and fools], except that they don't know you," Siegel says. "Likewise, the process can move very quickly and there can be flexibility in the structure of the return." Also, there are dozens of angel groups across the nation to tap; the Angel Capital Association has details.

Cons: "They are wildcards," Siegel warns. "They have their own rulebook, because it's their own money."

"It is essential that the requirements of the deal are laid out before the angel invests," says CPA and business consultant Robert Chalfin. Also, as with venture capitalists, bringing in an angel means you'll have another shareholder in the company.

Credit cards

Pros: For those who are credit-worthy, plastic is a particularly good source of capital for immediate money.

Cons: High interest rates, plus the risk of seriously damaging your credit, as even corporate cards are personally guaranteed. "This would be my last resort," says Cynthia Nevels of the North Dallas Small Business Development Center.

Grants

Pros: The government has specific units, such as the Department of Housing and Urban Development, that can help businesses if the venture falls into their target development area. Grants.gov is an official federal portal for information and applications for government grants. The Small Business Innovation Research program gives away about $2 billion each year to fledgling high-tech companies.

Cons: "Grants, by their very nature, are given to non-profits or to existing companies taking advantage of a specific qualification that it has," McKinley says. The bottom line: Most ventures won't fit the very niche criteria of grant-giving organizations. Hopeful business owners can contact SCORE for guidance.