For a variety of reasons, most banks are notoriously unwilling to lend money to a small business. In fact, small business owners cite that as one of their greatest complaints in study after study.

The good news tor business owners and aspiring entrepreneurs is, banks are not the only source of money. For the small business owner willing to employ a mix of creativity, ingenuity and old-fashioned leg work, there is a variety of alternatives available.

One of the most interesting is a package of small business initiatives approved by the U.S. Securities and Exchange Commission (the agency that regulates the stock and bond markets) in June of 1992. The goal of the new regulations was to make it easier for small businesses to raise limited amounts of capital through stock offerings that, the SEC hoped, would attract Wall Street's attention.

Regulation D, Rule 504, allows a small business to raise up to $1 million in a 12-month period, while Regulation A permits a stock offering of up to $5 million in a 12-month period. The SEC is considering raising the limit on Regulation A to $10 million.

"These rules represented the federal government's attempt to stimulate the economy by making more money available to small businesses," says Louis Perosi Jr., president of Charter Financial Network, based in Montville, NJ.

"The problem is, the government didn't make the regulations so simple that the average small business owner could come in and walk through the process nassisted," he notes.

The first year the new regulations were in place, there was a marked increase in the number of filings by small businesses. About 170 plans were filed from June 1992 to June 1993, up from about 87 during the preceding 12 months.

The SEC identified a couple of problems related to the rule changes. First, even though the changes were intended as an incentive to get Wall Street to take a greater interest in small businesses, the amounts of money involved were still too small to attract the big underwriters.

Second, fully half of the plans filed during the first year were done without the assistance of an underwriter or any outside consultant. Since even in their simplified form the regulations were still too complicated for most lay people to understand fully, many were technically deficient, resulting in protracted delays or outright denials.

Perosi, who spent most of his 22-year career with Wall Street financial firms specializing in the stocks of small businesses (small-cap companies, in Wall Street lingo), saw an opportunity for a niche business.

CUT-RATE PROS

"I got together some affiliated professionals and explained to them that there are hundreds and hundreds of small businesses looking to raise money," he says "They need the help of professional accountants and attorneys, but they can't pay the kinds of fees those professionals demand on a large-cap offering."

Fees for lawyers and accountants in large-cap stock offerings routinely climb into six figures -- as in $100,000 or more. Charter realized that new standards would have to be set to make this program workable for small-cap firms. The company established a network of professionals who agreed to limit their fees to about $7,500 to $10,000 for Regulation D-504 and Regulation A filings.

"When an applicant comes into Charter, the first thing we do is to determine whether it should even be a public company," Perosi explains. "That is by no means a foregone conclusion in all cases."

In order to consider a Regulation D-504 or Regulation A filing, a company should be established for at least three years; profitable, breaking even or at least on the verge of breaking even; have some capital of its own available; and have a qualified, professional management team in place.

A company that is publicly-owned, even in part, has much greater responsibilities than a privately-held venture, Perosi points out. "It has a legal and moral responsibility to its shareholders to make sure that company is managed and operated in the best way possible. The objective is to provide a profitable return to the investors," he says.

In cases where Charter determines a small business has the potential to be taken public under Regulation D-504 or Regulation A, it designs a program and then goes out to "test the waters," as Perosi puts it.

There is a section in Regulation A that allows a small company to test the waters for interest in its stock offering. That is generally done through some sort of promotion conducted by the issuer.

TYPICAL APPROACH

Typical is the approach taken by Manhattan Bagel Co., an Eatontown, NJ-based chain of 28 company-owned and franchised bagel bakeries and delicatessens.

Starting in mid-December 1993, Manhattan Bagel began placing in its stores banners, bag stuffers and placemats designed to resemble stock certificates, in order to gauge potential interest in its planned initial public offering (IPO). The effort was backed with a media advertising campaign, as well.

Customers and others who completed a postage-paid card, on which they could request an offering circular and franchise information, were promised an automatic entry in the company's contest to win shares of Manhattan Bagel stock. Each participating store was allocated 100 shares of stock, and separate drawings were held, guaranteeing a winner for each outlet.

"Between the in-store materials and what's believed to be the first giveaway of its type, the Manhattan Bagel program is breaking new ground," says Perosi. "While the SEC's liberalization of the Regulation A rules in June 1992 allowed companies doing self-underwritings to go beyond the traditional tombstone ad, this is probably the most comprehensive program developed to date."

Manhattan Bagel was uniquely well-suited to such a program because its multiple locations give it a built-in sales and marketing ability.

"People walk in and out every day. It made sense to target the people who eat the bagels and patronize the stores," Perosi explains. "Plus, the stores get a terrific mix of traffic, ranging from housewives to the presidents of companies on their way to work. So the program had the potential to provide a good gauge of support across a broad spectrum."

Manhattan Bagel chairman Jack Grumet says the company decided to proceed with the program after discussing its options with its attorneys, auditors and members of the financial community.

"We came to the conclusion that this may be a viable method for small companies like ours to raise money in the public markets without the high expenses incurred under conventional IPOs," he says.

He plans to use the proceeds from the IPO to accelerate and support the bagel chain's growth. Among other things, funds are expected to be utilized to complete the automation of the company's bagel dough factory, to open a second factory in 1994, to provide financing for franchisees, to hire additional staff, and to boost advertising and marketing efforts.

Charter Financial Network charges $15,000 plus expenses (which average about $200-$400 a month) for creating a Regulation D-504 program. Total expenses -- including printing, accounting, legal and other professional fees -- average about $35,000. Charter's fee is $25,000 for a Regulation A program, with total costs running about $60,000.

As attractive as the new SEC programs are, IPOs do not make sense for many small businesses, especially start-ups. They often find themselves in a "Catch-22" situation. They don't have the kind of history and management necessary for an IPO, but they also lack hard assets, which is the only collateral against which most banks will make a loan.

There are still alternatives for entrepreneurs who find themselves in that situation. The key lies in a business's cash flow -- or its potential to generate it.

"Lenders and investors are looking for the kind of cash flow that can make the deal worth while for them," says one New York City-based investor who arranges financing for small start-up businesses in the food-service industry.

"If you can demonstrate the potential for good cash flow, you can find a way to put together a financing vehicle," he says. "You just have to be creative and willing to work hard at it."

The first place to look is right at home -- literally. If you own a home free and clear, you can probably secure a mortgage on it. Even if you have an existing mortgage, a second mortgage (perhaps in the form of a home equity line of credit) is a possibility. Although mortgage interest rates had started to tick up by the end of 1993, they were still near 20-year lows.

One possibility for some companies is trade credit, usually in the form of extended terms from vendors and/or accelerated payments from customers.

If you can convince your vendors that their business represents an expanding growth opportunity for them, they might be willing to extend your payment terms. It's not unusual for vendors to agree to terms as long as 90 or even 120 days rather than the usual 30 days if they are convinced of the long-term potential of your venture.

Likewise, customers may be willing to accelerate their payments in return for some form of consideration, such as 2% off invoices paid within 10 days or the promise of discounts on future orders.

How about writing yourself a loan? That can be easier than it sounds if, like many consumers, you have a lot of credit cards.

To be sure, most business experts do NOT recommend using credit cards to finance your business. In a pinch, however, a credit card can provide access to badly needed cash much more quickly than just about any other method.