Failing to raise capital and maintain cash flow is the most common reason new businesses don’t last. Many small-business owners still face tight credit restrictions, but banks are not the only source for financing a start-up.

For many small-business owners, access to credit remains tight. Funding from angel investors, those who invest their own money in young companies, exhibited an 8.3 percent decrease in total investment dollars in 2009. Meanwhile, borrowing from friends and family has no doubt become more difficult due to the recession’s widespread effect on personal finances, not to mention the usual risks that come with borrowing from loved ones.

However, these are not the only sources for financing a start-up. In fact, there are a number of other options entrepreneurs have to finance their start-up business: venture capitalists, Small Business Administration government grants, microloans, credit unions and their own savings.

According to William Bygrave, the Frederic C. Hamilton professor of free enterprise at Babson College, entrepreneurs spend an average of $70,000 to start a business. (Source: Fortune Small Business)

“Some of the expenses incurred during the start-up phase will be one-time costs, such as the fee for printing up your brochures, creating your LLC or acquiring a permit, while others will be ongoing, such as rent, insurance or employees’ salaries,” according to the Wall Street Journal.

Whether you can raise sufficient funding depends in large part on where you look. The following are a few alternatives to banks and investors.

Merchant Cash Advances
Merchant cash advance firms give small businesses cash in exchange for a percentage of their future credit card sales, Forbes explains. Unlike loans, which come with a fixed coupon over a fixed time, this transaction aims for a target repayment amount that is collected over as long a period as needed until it’s paid off.

“After money is fronted to the business, that money is then repaid through automatic deductions from the business’s future credit card sales,” according to the National Federation of Independent Business (NFIB).

“[T]he provider will get paid as your business gets paid,” one such provider, AdvanceMe, Inc., says. “Fewer credit sales means it may take longer, while increased credit sales volume would cause your business to deliver the receivables more quickly.”

Accounts Receivable Financing
Commonly referred to as “factoring,” small-business owners can “sell their invoices to a third-party factoring firm at a discount, which could be anywhere from 1 percent to 6 percent of the invoice’s total,” NFIB says.

“They buy up your receivables at a discount and are reimbursed when your customers pay them,” Entrepreneur.com says. “Factoring provides you with immediate cash and allows you to pass on slow-paying clients to someone else for collections.”

“Factors have a first lien on those cash flows, so factoring arrangements are hard to strike if you have a judgment against your business or if your bank has a blanket lien on your assets to secure a loan,” according to Forbes.

Vendor Financing
Vendor financing is a loan arrangement that takes place between a company and a vendor that supplies large volumes to the company. The company lends money to one of its customers so that the customer can buy products from it. By doing this, the company increases its sales even though it is basically buying its own products. “Such a move ensures that the small business owner has the supplies to keep the business going, while the vendor gets the sale by agreeing to push back payment,” according to NFIB.

“This arrangement is different from extending a credit line, in that vendor financing involves the establishment of a specific amount that will be loaned, and with terms and conditions regarding the repayment of the loan within a specified period of time,” the aptly named WiseGeek explains.

Peer-to-Peer Lending Networks
Business owners can also tap into peer-to-peer lending networks — such as Prosper.com, LendingClub.com, Zopa.com and Peer-Lend.com — which allow lending transactions to take place directly between individuals. These online networks pair lenders with borrowers, typically charging fees to broker and service the loans as well as instituting penalties for late payments.

“On these sites, loan seekers request a specific amount (typically up to $25,000) at a specific interest rate, and lenders fund all or portions of the loan. Lenders are then paid back with interest over a set period of time,” a separate Entrepreneur.com article explains.

According to Forbes, “terms are generally three years, and annualized rates range from 9 percent up to the upper-teens.”

It is imperative that small-biz owners considering any of these alternatives understand the risks — which can be significant in any one of these strategies. For more information on each of these options, including the risks, see the resources below.

Resources

How to Raise Cash — Now!
by Helen Coster and Maureen Farrell
Forbes, March 18, 2010

4 Alternative Sources of Financing
National Federation of Independent Business

Business Cash Advance
AdvanceMe, Inc.

What to Do When the Bank Pulls Your Line of Credit
by Julie Bennett
Entrepreneur Magazine, February 2010

What is Vendor Financing?
WiseGeek

4 Alternative Funding Sources
by Mike Handelsman
Entrepreneur.com, Dec. 7, 2009

Where to Get Startup Cash Now
CNNMoney.com, March 24, 2010 (last updated)

Additional

Four Sources of Alternative Funds
by Colleen DeBaise
SmallBiz, July 9, 2008

Small Business Credit in a Deep Recession
National Federation of Independent Business, February 2010

The Angel Investor Market in 2009
Center for Venture Research (University of New Hampshire)

Start-Ups Will Keep Struggling in 2010
by Colleen DeBaise
The Wall Street Journal, Jan. 5, 2010

How to Calculate Start-Up Costs
by Colleen DeBaise
The Wall Street Journal, March 22, 2010

Funding From Family–Is It a Recipe for Disaster?
by Raymond Hennessey
Entrepreneur.com, July 24, 2003

Obtaining Capital: Obtaining Funding — Friends and Family
Gaebler.com

How to Fund Your Small Business with Venture Capital
National Federation of Independent Business

Financial Assistance for Borrowers
U.S. Small Business Administration

Microloans 101: What They Are and How to Get One for Your Small Business
National Federation of Independent Business

7 Great Ways to Finance a Startup
by Ann Field
Fortune Small Business Magazine, Oct. 18, 2007

Earlier

Where to Go When Banks Say No

How to Find Good Money

Surviving the Credit Crunch

Microloans Serve as Small-Biz Lending Alternative

4 Tips for Determining the Right Lender