(MONEY Magazine) – THE BIG SECRET TO raising capital? All struggling entrepreneurs have learned the answer: It's collateral, collateral, collateral. Unfortunately, most small-business owners are noticeably short on assets, which leaves them scrambling to pledge banks their homes, their horses, their grandmothers' antique watches and even their wives' diamond rings. The truth is, however, as an entrepreneur you probably have more collateral to borrow against than you realize. Some of your more obvious assets may include your personal credit cards, your company's cash flow and your Individual Retirement Account. But you can also borrow on the strength of your character, your management experience and your customer contracts. Even a plain old checking account will probably get you a $10,000 bank overdraft line. Says John Nickoll, co-chief executive of the Foothill Group, a Los Angeles lender and asset manager: "There's a lot of credit out there that's frequently overlooked." That's not to say you should avoid traditional credit channels. Start first with the least expensive loans -- from friends, family members or banks. In fact, nearly half of outside financing for small business comes from commercial banks, according to the National Foundation for Women Business Owners (NFWBO). "Small business is the fastest-growing segment of our market," says Joseph May, an executive vice president at the Whitney National Bank in New Orleans. Alternatively, many entrepreneurs turn to venture capitalists, who last year put up $4.2 billion for small businesses, 19% more than in 1992, reports VentureOne, an investment research firm in San Francisco. To find a venture capitalist, sign up with Business Opportunities Online, an electronic listing service; basic cost: $15 per hour of computer time (for details, call 800-872-3077). State and local government small-business investment programs are another possible source of funds. For example, the New York Job Development Authority approved $24.3 million in loans and loan guarantees in the first three months of fiscal 1995, up from $7.6 million for the same period in fiscal 1994. To find a similar program near you, call your state's department of economic development. Yet another source of help is the National Business Incubation Association (614-593-4331), which can give you information on 550 business incubators, sponsored by universities and local governments to lend money to fragile start-up companies. When all else fails, the key to raising money is ingenuity and persistence. "If you'll take no for an answer, don't go into business," says David Dunn, founder of a $3.5-million-a-year company in Clinton, Mass. that restores flawed books for manufacturers and publishers. To build his business, Dunn cashed in his pension account with an ex-employer and his Individual Retirement Account and borrowed against his home and his credit cards. He even finagled a $100,000 so-called deferred-maintenance loan from the U.S. Department of Housing and Urban Development to repair his office roof. Dunn's advice: "When someone says no, look for an alternative." Read on for five alternative forms of collateral you may not realize you have, starting with ones that are likely to win you the cheapest, easiest loans.

Your character

FOLLOWING A directive from President Clinton, about 200 of the 3,300 large banks regulated by the Office of the Comptroller of the Currency have created a variety of character loans that aren't looked at by bank examiners as long as payments are made on time. (The Federal Reserve and the FDIC, which also regulate banks, are encouraging smaller banks to make character loans too.) How do you establish your character? The best way is to cultivate a relationship with your local bank before you need money. Take, for example, Emilio Mendoza, 60, chief executive of Galactic Technologies, a $5 million (annual revenues) hardware and software engineering firm in San Antonio. "We'd been talking to Texas Bank about setting up a relationship because we knew we were going to grow," he says. Last January, when Mendoza won two contracts from Brooks Air Force Base that required him to hire 25 new people immediately, he needed $50,000 to meet his first payroll. He called loan officer Teresa Saenz on a Wednesday and asked for an SBA-guaranteed loan -- by Friday. Usually, such loans require four weeks to process, but Mendoza and the bank used a new SBA program called LowDoc (for low documentation) that has potential borrowers fill out a simple, one-sheet application for loans of as much as $100,000. Under LowDoc's rules, the SBA promises to decide on the applications within three days. (The maximum SBA interest rate was recently 10.5%.) Says SBA spokesman Mike Stamler: "We are going on the borrower's reputation, credit history, whether he or she has committed a crime. We want to know that you don't eat kittens for lunch. We can check most of those things just by having your name and address." By 2 p.m. on Friday, Mendoza had his money and met his payroll. To find out about SBA loan programs, call an SBA district office near you. The number is in your phone book, or call the SBA at 800-827-5722.

Your management experience

A TRACK RECORD as a successful manager and a strong resume will boost your credibility with a bank -- and your odds of getting a loan -- tenfold, according to Joseph May at Whitney National Bank. "Our single most important criterion is management experience," he says. A good credit history is essential too. But May says: "If you don't have management experience, your chances of getting a bank loan are pretty slim." What if you don't have a track record? In that case, you might follow the example of Steve Davis, 41, owner of the $7 million Plaza Red Bud Supermarket in Tulsa. In 1987, Davis wanted to add a video-rental department to his store, but he couldn't get bank financing, partly because he had no video business experience. So he teamed up with someone who did -- the operator of a small local video store. In exchange for free rent and electricity, the operator moved his business into the Plaza Red Bud Supermarket. Then, says Davis, "I tracked his sales and profits." Over the next year, the video business grew from just 250 to 3,000 movies in stock. When another grocery chain bought out the video operator, Davis parlayed his store's video sales and profit figures into a $50,000 bank loan. Since then the video business has expanded to more than 5,000 movies and 1,000 video games, adding $130,000 to Plaza Red Bud's revenues. What's the best way to find a partner who has the management expertise you lack? Try spending a little more time on the golf course or at neighbors' cocktail parties. Seriously. Small-business lenders say that social activities are far and away the most common route to forming business partnerships. Or ask your local chamber of commerce to suggest a partner.

Your home equity

IF YOU OWN a very small business -- with sales of less than $100,000 or so -- or want to start one, a great source of funds lies in your residence. "Because it's less risky, the approval rate for a home-equity loan is typically much higher than for the average business loan," says Dan Morefield, head of small-business lending at First Interstate Bank of California. Over the past six years, the percentage of home-equity lines of credit taken out for business expenses has soared from 7% to 28%, according to a study by the University of Michigan Survey Research Center. A typical loan or line of credit runs between $25,000 and $50,000. For example, if you have $50,000 in home equity and want to borrow $25,000, a bank recently would charge you about 91/2% to 10%. One advantage of home- equity borrowing: The interest is tax deductible. The risk, of course, is that if your business fails, you could lose your home as well. On the other hand, that could happen with a conventional business loan too, because banks usually require the owner to co-sign such notes personally. That reasoning led Steve McNamara, 60, owner of McNamara Sports (sporting goods) and Khakis (casual clothing) in Merced, Calif. to borrow $25,000 against his home equity rather than take out a business loan to open a second Khakis in Sacramento. Is he worried about losing his house? A little. On the other hand, he says, "I figured, what the hell. If the bank gave me a business loan, the loan officer probably would want me to put my house and dog and cat in as a personal guarantee, and if I defaulted they'd take my house anyway. So what's the difference?"

Your credit cards

ACCORDING TO the NFWBO, some 52% of women entrepreneurs, compared with 18% of all small to medium-size firms, use credit-card financing to get their businesses rolling. "If you have a good credit line, a credit card is worth considering as a way to raise cash," says Lawrence Wodarski, a senior vice president with the Money Store, a Sacramento-based finance company with 140 offices nationwide. "The interest rate is 18%, but the loan is unsecured, so there is no lien on your firstborn." The trick, if you can do it, is to pay off the balance each month before the grace period ends, thus avoiding any interest charges. Of course, once your business is up and running, you should seek a cheaper form of financing as quickly as possible. Consider, for example, Satyendra P. Shrivastava, 55, an immigrant from India. In September 1983, he was unable to get conventional financing to launch his computer-systems company, Anstec of Fairfax, Va. So he started borrowing on his credit cards. By mid-1984, he had total debt of $20,000 on four cards -- two Visas and two MasterCards. Because he always made the payments on time, he soon attracted offers for more bank cards. He accepted all of them and by 1988 had 20 Visa and MasterCards and two personal lines of credit, giving him the means to borrow more than $100,000. "It was very tricky to manage," Shrivastava recalls. "It took the work of a very sharp accountant -- my wife Sudha -- to see that every payment was made on time." With interest rates as high as 22% on some cards, he paid $20,000 a year in interest. In late 1988, however, Shrivastava managed to obtain a $200,000 line of credit from Signet Bank, which he used to pay off his credit- card balances and provide working capital for his company. Today that line has grown to $6 million, and this year Anstec will do close to $42 million in business. Says Shrivastava: "It gives me a lot of pride to know I could manage myself and my credit."

Your accounts receivable

OWNERS OF growing companies that are only one to three years old and have sales of less than $10 million may be able to borrow against accounts receivable or their inventory. There are two ways to go: asset-based loans and so-called factoring. Over the past five years, the number of small, independent finance companies formed to provide asset-based loans and factoring to small companies has surged fivefold from about 20 to more than 100, according to the Commercial Finance Association (212-594-3490). Asset-based lenders essentially make loans against accounts receivable or the value of inventory or equipment that they could liquidate if you default. For example, an asset-based lender generally will let you borrow up to 80% of nondelinquent accounts receivable, at interest rates ranging from about 14% to as high as 50%, depending on the lender's cost of funds and the size and riskiness of the loan. Factoring companies, by contrast, actually buy your receivables at a discount of 11/2% to 5%, depending on the size of your invoices and how long they remain outstanding. Too expensive? Not if you need the money badly enough. "If we give a company a line of credit and its sales rise $1 million as a result, the incremental profit offsets the high interest rates," says Bron Hafner, president of Celtic Capital, an asset-based lender in Santa Monica. "Some owners put off using such high-cost financing. Six to eight months go by, and they miss the opportunity for increased sales and profits. We call that the cost of wallowing." One of Hafner's clients, Kenneth J. Friedman, 59, the chief financial officer of NSD Warehousing & Distribution Systems in Long Beach, Calif., didn't make that mistake. Five years ago, Friedman and his partner William S. Sampson, 48, turned to Celtic for operating capital. Celtic collects NSD's billings each day and lends the warehouse company roughly 75% of the receivables the lender deems eligible. The interest rate: prime plus 20 percentage points, or 273/4% recently. Although Friedman won't disclose the ! numbers, he says sales have tripled since 1990. "I would not say this is the lender of last resort, but it practically is," he admits. "It's the most expensive form of borrowing. But if you don't have it, you may not be in business. So what's the choice?" The choice for Melanie G. Boone, 35, owner of Melanie G. Boone Ltd., an appointment-only wardrobe consulting business in Charlotte, N.C., was to create her own factoring company. In 1988, Boone, who had started her business at age 21 with only $300, formed Associates Credit and began extending $2,000 to $5,000 lines of credit to her top clients. Boone then sold the debt to Associates Credit, which charged Boone's customers 18% interest and billed Boone a 3% management fee. "I figured a factoring company is going to charge 3%," Boone says. "Why can't I do that? Plus, it gave me something to sell. I think it's pretty ingenious." Eventually, she sold Associates Credit, with the proviso that the buyer finance her receivables at no charge. Today, as a measure of her success as a shrewd businesswoman, Boone can walk into any local bank and get a signature loan -- without having to put up any collateral at all.