Without a doubt, entrepreneurs have had a tough time obtaining loans from banks due to tightened restrictions and higher borrowing costs. In an April survey of senior loan officers conducted by the Federal Reserve, approximately 40 percent of domestic respondents reported tightening their credit standards for small firms in the last three months.

Venture capitalists are reluctant to invest as well. The National Association of Seed and Ventures Funds, a nonprofit organization that encourages development of new businesses, recently surveyed 5,000 early-stage venture capitalists and reported some unwanted findings: 90 percent of already-funded companies can't get additional funds to move their businesses to the next level; 60 percent of early-stage funds aren't making any new investments; and 42 percent of companies investors are putting money into have been stripped of their credit lines.

According to BusinessWeek, venture capital investment plummeted 61 percent in the first quarter to $3 billion.

Angel investors, those who invest their own money in young companies, have also cut back. In 2008, the number of investments by angel investors decreased 26.2 percent to $19.2 billion, the Center for Venture Research reports. There were 55,480 entrepreneurial ventures that received angel funding in 2008, a decrease of 2.9 percent, but the number of investors (260,500) remained virtually unchanged.

This year isn't looking any better for entrepreneurs seeking new angel funding. The latest poll from the Angel Capital Association (ACA), a trade organization for North American angel investment groups, showed that only 12.3 percent of its members were planning to raise new funds this year. Rather than investing in new companies, 32.3 percent of angel investors are focusing on their existing portfolio.

Nonetheless, start-ups might still have a chance at snagging an angel investor: 29.2 percent of ACA poll respondents said they were planning on growing the number of members in their investment groups this year. Moreover, 23.7 percent of ACA's members said they "might more aggressively seek new deals on an opportunity basis."

To find angel investors, Entrepreneur Magazine suggests checking with universities, business incubators, venture capital clubs and angel confederacies. Individual angel investors typically put in $10,000 to $1 million and a group of angel investors can offer funding from $300,000 to $5 million, Entrepreneur Magazine adds.

Even if entrepreneurs are turned down by banks, venture capitalists and angel investors, there are alternative funding sources to consider.

Bootstrapping
Bootstrapping is when entrepreneurs use their own money to get their companies off the ground. By managing the business financing better, owners can raise capital or improve cash flow. "You can be creative in finding ways to raise profits, without having to look to external sources," Entrepreneur Magazine notes.

Consider having customers pay up front by selling memberships, subscriptions or gift certificates, morebusiness.com recommends. Advance deposits and retainers can also keep entrepreneurs flush.

Along with paying ahead, or at least on time, customers can help with cash flow in other ways. Business owners might consider asking their customers for a letter of credit to get supplies. By using the letter of credit as security, businesses won't have to put up a penny to buy the materials, Entrepreneur Magazine says.

Some other ways to "bootstrap" include using your home as your business facility, morebusiness.com says. If you can't, Entrepreneur Magazine suggests leasing a facility, as it would cost less up front. Aggressively cut costs, barter and do whatever else is necessary to generate cash flow and profits, morebusiness.com concludes.

Microloans, Credit Unions and Peer-to-Peer Networks
Small business owners could also consider microloans or borrowing from credit unions and peer-to-peer networks.

Microloans range from $5,000 to $25,000 and typically carry higher interest rates (8 percent to 13 percent) than bank loans, SmartMoney's SmallBiz site explains. However, they are usually subsidized by federal, state and local grants. To find a microlender, visit the Small Business Association or search the Association for Enterprise Opportunity's database.

A credit union is another type of non-profit lender. Unlike banks, credit unions tend to rely more on a borrower's business model or track record rather than credit scores, SmallBiz adds. Because of their less stringent lending criteria, credit union business lending has grown 18.6 percent since 2006 and currently has $28 billion in outstanding business loans, according to a Credit Union National Association estimate, SmallBiz reports. They are, however, limited by federal regulation on how much they can loan and therefore can't lend as much as banks. The average business loan size in 2007 was $181,000.

Peer-to-peer networks, on the other hand, are individual lenders that lend for profit, SmallBiz says. Interested borrowers must present to the network the amount they need, why they need it and details about their businesses. If approved for the loan, entrepreneurs can receive up to $25,000. The interest on these loans can range from 7.7 percent to 8.5 percent. These loans are considered consumer debt and will be reported on the owner's credit report, not the company's.

Unsecured Loans
Perhaps the most expensive way to raise funds is through unsecured loans — credit cards, merchant cash advances and factoring. As author and entrepreneurship expert Barry Moltz writes on his blog, credit cards can be the first line of capital and are also the most dangerous. "Rates can be high and minimum payments low. But if you are unable to pay back the credit extended in a timely manner, it can lead to a financial death spiral for you and your business," Moltz says.

Merchant cash advances can also be dangerous due to their double-digit or triple-digit interest rates. 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. Typically, merchant cash advance companies lend out only 70 percent to 90 percent of the amount they ultimately collect, SmallBiz notes. In a period of six to nine months, a cash advance merchant can collect $36,000 from a $30,000 advance.

Factoring is a similar financing process. Companies sell their accounts receivables in exchange for an advance that is generally about 80 percent of the invoices outstanding, the Wall Street Journal explains. The factoring company holds on to the remaining 20 percent to cover its fees and returns the balance to the business when all receivables have been paid. Factoring fees range from 2 percent to 6 percent of the invoice amounts. To find a factor, try Factoring.org's free searchable directory.

There are many more ways to raise funding, whether through joint ventures, private equity loans or cashing out retirement funds. Small-biz owners might also consider equipment leasing and trade credits. The important thing is finding the right funding source for your particular business.

Related

Surviving the Credit Crunch

Microloans Serve as Small-Biz Lending Alternative

Small Biz Owners Revisiting Age-old Tradition: Bartering

How to Find Good Money

4 Tips for Determining the Right Lender

Resources

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices
Federal Reserve Board, May 4, 2009

'Super Angels' Shake Up Venture Capital
by Spencer E. Ante
BusinessWeek, May 21, 2008

90% of Young Entreprenurial Companies Can't Find Follow-on Funding
National Association of Seed and Ventures Funds, April 6, 2009

The Angel Investor Market in 2008: A Down Year in Investment Dollars but Not in Deals
Center for Venture Research, March 26, 2008

2009 Angel Group Confidence Report
Angel Capital Association, April 2009

2008 ACA Angel Group Confidence Report
Angel Capital Association, December 2008

Angel Investors
Entrepreneur Magazine

Angels Flee from Tech Start-Ups
by Claire Cain Miller and Brad Stone
The New York Times, Feb. 3, 2009

6 Sources of Bootstrap Financing
Entrepreneur Magazine

Small Business Bootstrap Financing Tips: Financing Your Own Business
by Stephen Pope
morebusiness.com, 2007

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

Small Talk: Factoring as Alternative Financing
by Kelly Spors
The Wall Street Journal, Oct. 7, 2008

Show Me the Money: Creative Sources of Capital for Today's Emerging Company
by Barry J. Moltz
Barrymoltz.com

How to Raise Cash — Now
by Maureen Farrell and Brett Nelson
Forbes, Jan. 30, 2009