The OTHER Colors of Money
When banks and Venture Capital  don’t have the money you need, try these three options for raising capital.
By David Worrell

Finding enough money to launch and sustain a fast growing company can be a daunting challenge.  And yet, alternative sources of financing are abound if you look in the right places.

So if banks or Venture Capital are not forthcoming, try these three other sources of capital:

1. Hidden Personal Wealth
If you really believe in your business – and you should – then it’s natural that you should try to bankroll yourself.

Before you apply for a wallet full of new credit cards or a second mortgage however, look for other hidden sources of personal wealth. Life insurance policies, 401(k) plans, IRAs and stock portfolios are among the most commonly overlooked sources of business capital.

Start with your life insurance policy. If you have a whole life policy, you may have the option of withdrawing the cash value of the policy.  Even better, you can pay the balance back (to yourself) at a flexible rate – or not at all if you choose. In some cases, any unpaid balance will simply be deducted from the death benefit when you die. You can’t take it with you anyway, so why not use it to grow your business?

Retirement accounts are the next logical place to look for hidden wealth. A 401(k) may have cash value that can be either withdrawn or used as collateral for a loan.  IRA accounts, including SEP and SIMPLE plans, typically have stricter limitations on borrowing or investing. Check with your plan administrator or personal financial planner for details.

Finally, don’t forget about your stock accounts.  Most brokerages offer “margin” loans, but your local bank or savings and loan may offer better interest rates.

2. Angel Investors
If your personal resources are tapped out, don’t despair. The next best source of small-business capital may be right next door.

According to the University of New Hampshire’s Center for Venture Research, there are over 400,000 active individual or "angel" investors who invest in more than 50,000 companies each year.  Compare that to the country's 450-some venture funds, which, according to the National Venture Capital Association, invested in just 2,715 companies during 2003. Clearly, individuals—not VCs—are much more likely to provide the capital that your business needs to grow.

In addition to these “active” angels, keep an eye out for more opportunistic individual investors. Casual investors – most often people you already know – pour millions of dollars into young businesses with little formality or fanfare. Like the businesses they invest in, angels come in all shapes and sizes.

The best news is that more angels are joining clubs or networks. A new industry association of angel groups has even emerged. Called the Angel Capital Association, the group was founded with the help of the Ewing Marion Kauffman Foundation in Kansas City. The association keeps tabs on angel groups and estimates that there are over 200 nationwide.  Check out www.angelcapitalassociation.org for some interesting facts about angel investing.

3. Commercial Lenders
The more critical your need for cash, the less useful traditional banks become. That’s where a commercial finance company can step in.

Commercial finance companies – also called commercial lenders – are not subject to the same regulations as a bank, so they can look at riskier loans. Of course, to make up for the increased risk, commercial lenders will charge slightly higher rates of interest.

Like a bank, most commercial lenders will look for loan collateral, which can include accounts receivable, inventory and factory equipment.
And if you don’t have a lot of assets? Look for unsecured, mezzanine or subordinated loans. Rates for these loans are about equivalent to those of a credit card.

Subordinated and unsecured credit is widely available to businesses with solid operating profits, sometimes to the tune of two or three times annual cash flow.

The biggest commercial finance lenders include GE Finance, Textron and CIT. But there are hundreds of smaller shops that specialize in lending against particular types of collateral or to businesses within a particular industry.

David Worrell is the Director of Emerging Business Services at Triarch Capital Partners and a board member of the Business Innovation and Growth Council (BIG).