(MONEY Magazine) – Cash-hungry entrepreneur joel Hensley wasn't about to let rejection grind him down. In early 1994, the 27-year-old owner of Market Street Coffee & Tea in Fresno, a three-employee store with annual sales of $170,000, needed $50,000 to open a second shop across town. None of the five banks he approached stepped up to lend him the money. The problem: Though his concept as well as his coffee was strong, his business plan was weak. Recalls Hensley: "Bankers weren't enthusiastic about my prospects."

Undeterred, Hensley pumped up his presentation with detailed financial statements that highlighted the success of his original store and his excellent credit history. He further enriched the 30-page plan with color photos of his best-selling products, $2 to $3 specialty drinks, such as cappuccino and iced cafa mocha, with profit margins as high as 1,000%. His persistence and preparation paid off. In March, the Money Store, a national financial services company, agreed to lend Hensley the cash he needed at an interest rate of 11.5%. His second coffee shop is set to open in June.

Without capital, as entrepreneurs like Hensley will tell you, even the tastiest new business ideas aren't worth a row of Colombian coffee beans. The good news is that, for small business owners who do their homework, now may be the best time in at least a decade to raise money. With the economy growing at a 3%-plus annual clip and financiers of all types hoping to catch the next Starbucks or Callaway Golf, entrepreneurs are suddenly finding it easier to raise cash from three traditional sources:

COMMERCIAL BANKS. After three years of Scroogelike behavior, during the first 11 months of 1994 U.S. banks handed out $646.4 billion in commercial loans, up 10.1% from the year before. According to data from the Federal Reserve System, more than half of that money came from small banks, which make most of their loans to small business customers.

THE SMALL BUSINESS ADMINISTRATION. Reinvigorated by its popular new Low Documentation (LowDoc) loan program for small business loans of less than $100,000, the SBA is rolling out a number of new products that make it faster and easier for women, minorities and very small companies to get government-guaranteed business loans.

NONBANK LENDERS. Three popular sources of nonbank financing for small companies--suppliers, asset-based lenders and venture capitalists--are looking at the booming small business community as an important source of their future growth. Example: Factoring companies, which purchase accounts receivable for cash up front, are expanding beyond their traditional customer base in the apparel and textile industry to finance firms in everything from electronics to health care.

Yet while the worst of the credit crunch appears to be over for small business owners, the rules of the game for obtaining credit are changing. Today's top money sources are limiting their risk by looking not just at cash flow and collateral but more intently than ever at the character and creditworthiness of the borrower. Says Raymond Rusnak, senior vice president at First National Bank of Chicago: "For small companies, the credit history of the owner is the best guide to the creditworthiness of the business."

In other words, it's not just your company that moneylenders are interested in these days; it's you. As would-be coffee king Joel Hensley learned, to grab their interest, you must learn how they operate and what they want-whether it's a solid business plan, management experience or a flawless credit rating-and then give it to them. Here's a look at the top sources of financing for small business and how to make them give you the money you need to succeed.

GETTING YOUR BANKER TO GREEN-LIGHT YOUR LOAN

Commercial banks are one of the cheapest sources of borrowing for small companies, typically charging interest rates of just one to two percentage points above prime (recently 9%) for small business loans. Unfortunately, getting a bank loan is seldom a slam dunk. According to Latimer Asch, a manager at Fair Isaac & Co., a statistical modeling firm in San Rafael, Calif., only half of all commercial bank loan applications by small businesses are approved. "Banks have ground rules, and often the failure to get a loan is the fault of the business owner," says Frank Dalton, a partner in the Atlanta office of the accounting firm BDO Seidman. "To get a loan, you must demonstrate you have two things--sufficient collateral and an ability to repay the debt." Here are four ways to convince your local lenders that you have a business worth banking on:

FIND A BANK WHERE SMALL BUSINESS LOANS ARE A PRIORITY, NOT A SIDELINE. Small community banks, which have a long history of providing loans and personalized service to local entrepreneurs, are still the best source for loans of less than $1 million. Unfortunately, such banks are increasingly hard to find: According to Smith Barney Inc. and FinExc Group, a New York bank consulting firm, industry consolidation has caused the number of independent community banks to shrink to 2,733 from 9,667 in 1980.

To find a small business-friendly bank near you, you can invest $84 in a copy of a new study, Small Business Lending in the United States, published by the Small Business Administration, that will identify the top small business commercial bank lenders in your state. (Call the National Technical Information Service at 703-487-4650 and request document No. PB95179271.) Once you've identified a few candidates in your area, shop around for a bank that's willing to negotiate fees, collateral and terms of repayment.

CLEAN UP YOUR PERSONAL FINANCES. A new study of 5,000 business loan applications made to 17 banks draws some surprising conclusions. The study, conducted by Fair Isaac and Robert Morris Associates, a Philadelphia-based trade group for loan officers and credit risk managers, found that among 400 pieces of data collected by banks to evaluate loan applicants, less than a dozen factors accurately predict the likelihood that the loan will be repaid on time. The most important variable: the credit history of the borrower.

As a result, these days bankers are paying more attention to the applicant's net worth and prior performance in paying back loans, instead of merely looking at the balance sheet and historical cash flow of the business. So when asking for money, be prepared to give your banker your income tax returns, brokerage statements and proof of ownership of your home. Also, get a copy of your credit report from one of the three major credit bureaus--Trans Union (610-690-4909), Equifax (800-685-1111) and TRW (800-682-7654)--and clear up all of your credit problems, tax obligations and liens before you and Mr. Moneybags meet.

MAKE SURE YOUR COMPANY'S FINANCIAL STATEMENTS ARE IMPECCABLE. Though character and personal creditworthiness are important, nothing will impress a banker more than healthy financial reports. In particular, your banker will look closely at three key documents:

BALANCE SHEET. The higher your net worth and the lower your debt-to-equity ratio, the better. "Lenders are often reluctant to lend more if the debt-to-equity ratio is over 3 to 1," says Steven Mayer, an audit partner in the New York accounting firm Goldstein Golub Kessler & Co. "For a start-up or very small company, a 2-to-1 ratio may be the cutoff point."

INCOME STATEMENT. Keep in mind this cautionary note: While it might be tempting to use your business to pay for quasi-personal expenses, from entertaining to company cars, Mayer warns that by inflating costs you will make your profit and loss statement look weaker.

CASH-FLOW STATEMENT. Some lenders request best-case, worst-case and average cash-flow projections going out 15 months. "We compare these numbers with historical statements from the past three years," says Jeff Pfeffer, senior vice president at Bank Leumi in New York City. "If they show growth rates going from 5% per year to 20% and gross margins tripling, we'd want to know what's changed to merit this optimism." A tip: Err on the side of conservatism with your projections.

If you can afford to computerize your accounting system, you should. After being rejected by three banks for a $50,000 working-capital loan, Ruth Washington-Dean, chief financial officer and co-owner of Visions USA Inc., a 20-employee advertising and conference support company in Atlanta, installed a job-order cost-accounting system. In addition to measuring each project's profits, it produces the kind of clean, accurate financial statements that bankers adore. Indeed, Bank South commercial loan officer Timothy Crim liked Visions USA's new financial controls so much that two years ago he agreed to give the company a $50,000 unsecured line of credit-quite a coup for a small business that at the time was reporting only $600,000 in sales.

Leading easy-to-use small business accounting programs include Intuit's QuickBooks ($99), Peachtree Accounting for Windows ($121) and NEBS' (New England Business Services) One Write Plus Accounting ($51).

HOW YOU CAN PICK THE BEST SBA LOAN PLAN

Under the clinton administration, the Small Business Administration has set out to make more credit available to small companies at affordable rates--with less paperwork and at less cost to the federal government. In the fiscal year that ended last Sept. 30, lending in the SBA's principal program, the 7(a) program for working capital, surged to $8.18 billion, up from $5.6 billion in 1992. The number of small loans--those for less than $100,000--nearly doubled in the same period, to more than 13,600 from less than 7,600. At the same time, the SBA's budget was slashed to $650.7 million from $947.1 million.

Yet as fast as the SBA can open its spigot, thirsty entrepreneurs are drinking it dry. The agency guaranteed nearly double the number of loans in the first six months of fiscal 1995--28,000--that it did during the same period of 1994. (The SBA doesn't actually do any lending; rather, it guarantees banks and financial services firms that if they make an SBA-approved loan and the borrower defaults, the SBA will repay up to 90% of the outstanding balance.) "The demand for our programs is unprecedented," says Cassandra Pulley, the agency's deputy administrator. SBA loans are appealing because they offer competitive interest rates (the maximum SBA interest rate was recently 13.75%) and a long payback period. Business borrowers have up to 11è years to repay most SBA loans, vs. three years with a conventional bank loan.

Listed below, in descending order by volume of loans made, are three SBA initiatives intended to make more credit available to women, minorities and very small businesses. To find out more about these and other SBA loan programs, call an SBA district office near you. Check the government pages of your phone book for the number, or call the SBA at 800-827-5722.

THE LOW DOCUMENTATION (LOWDOC) LOAN PROGRAM. Desperately in need of working capital last July, Orlando entrepreneur Hank Ohnstad, 46, approached Liberty National Bank about getting a $75,000 SBA-guaranteed loan. Rather than spending four months filling out a two-inch-thick application package that is common with such loans, Ohnstad, who owns Capitol Building Maintenance, a janitorial services company, submitted a simple one-page application. The next morning he got a phone call from the bank's president, William B. Gossett. "I was thinking there must be something I omitted," says Ohnstad. "But Bill said, 'You didn't omit anything. We have your loan.' I said, 'You've got to be kidding.'"

Fortunately, Ohnstad's loan, which he obtained through the SBA's popular new LowDoc Loan Program, was no joke. LowDoc loans were created in 1993 to cut the paperwork requirements and loan processing time for small business loans of $100,000 or less. They carry a typical interest rate of 2.25% over prime. Less than a year after being rolled out, they account for more than half of all SBA financings.

Could you be a candidate for a LowDoc loan? Yes, if you want to start or purchase a small company, or if your company has 100 employees or fewer and your average annual sales for the preceding three years do not exceed $5 million. LowDoc applications focus on the borrower's character, credit history and business experience, which are relatively easy to check out--hence the simple one-page form and the maximum three-day approval process.

Bankers love LowDoc: In southwest Texas, where the program began, 90% of eligible lenders are currently making SBA loans, up from less than 65% when LowDoc began. Borrowers are happy too. Says Ohnstad, whose LowDoc loan was instrumental in allowing him to buy his janitorial company--and meet payroll--last summer: "The loan has made all the difference in the world to me. The happiest day of my life was when I became an owner."

THE MICROLOAN PROGRAM. Over the past three years, the SBA has seeded 101 local economic development groups around the country with as much as $2.5 million each. Their mission: to provide technical assistance and make loans of up to $25,000 to fledgling companies in inner cities and rural areas, a large percentage of which are owned by women and minorities. The average microloan is about $10,000, compared with more than $160,000 in the SBA's traditional programs.

One happy recipient is Denise Auen, 31. Thanks to her upstanding character and proven creditworthiness-traits that microlenders especially value-two years ago Auen received a $3,000 microloan. The money allowed the Kingsley, Iowa (pop. 1,100) native to open a one-chair barbershop in a rented garage. Today her Kingsley Barber Shop--now located in a Main Street storefront--is thriving. Says Auen: "The microloan program gave me a chance I would never have gotten anyplace else."

THE WOMEN'S PREQUALIFICATION PILOT LOAN PROGRAM. As part of its attempt to increase the number of SBA-guaranteed loans that go to women, last June the agency rolled out its Women's Prequal program, which helps women business owners qualify for loans of $250,000 or less. Under the program a woman business owner can receive pre-approval from the SBA for a loan guarantee before going to a bank. Nonprofit organizations such as Chicago's Women's Business Development Center (312-853-3477) help prospective women borrowers develop a viable loan application package. If the SBA approves it--generally within three days of receiving it--the business owner gets a letter saying the SBA will guarantee as much as 90% of the loan.

Since the program, which is being piloted in 16 sites, was begun last summer, more than 359 loans have been approved totaling $33 million. For more details, call the Office of Women's Business Ownership (202-205-6673).

WHERE YOU CAN TURN WHEN YOU GET SPURNED

Enterprising though they may be, many entrepreneurs still get dissed by the traditional first-choice money sources--that is, banks and the SBA. In fact, in a 1994 Arthur Andersen & Co. study, 26% of the 750 small and medium-size business owners (those with less than 500 employees) surveyed said they had been rejected at least once for a bank loan in the preceding 12 months.

Fortunately, as Estevan Banegas found out, banks aren't the only game in town. Two years ago Banegas, a 53-year-old former Ciba-Geigy executive, launched Dominion BioSciences, a biotechnology outfit in Blacksburg, Va. Its lead product: an environmentally friendly pesticide that inhibits the reproductive process in cockroaches.

Realizing that neither banks nor venture capitalists would give him the $2 million in start-up capital he needed, the resourceful ex-Marine captain started dialing for dollars. First he licensed the necessary technology to manufacture the pesticide from the two universities, Virginia Tech and Penn State, that pioneered it. In return he gave them an equity stake in his company and agreed to pay royalties once the product hits the market. He sold another 10% of the company for $300,000 to six private investors he found through a local banker. Says Banegas: "My philosophy is try anything--and never stop looking for money."

Banegas is right: Success in raising capital belongs to entrepreneurs who won't take no for an answer. Here's a look at three popular alternative financing sources, listed in ascending order of risk, that you should consider when banks and the SBA say so long:

Your suppliers. Tapping your suppliers, customers, manufacturers and distributors for money is one of the best--and least risky--ways to raise cash when other sources aren't available. The reason: These people have a vested interest in your survival, so they're often willing to front you money on extremely favorable terms. It's not uncommon, for example, for suppliers to allow longstanding customers to stretch out their payments, without charging them any interest. Such flexibility explains why, in the Arthur Andersen survey, one out of six companies with 19 or fewer employees reported having used so-called vendor credit--cash from suppliers--to help meet their capital needs.

When he ran into a cash-flow crunch six years ago, entrepreneur Roger Lepley, 48, did just that. Founder of Kalamazoo Banner Works, a $3-million-a-year Michigan maker of decorative banners, Lepley worked out a deal with one of his suppliers for a $100,000, five-year loan secured by the company's 15,000-square-foot screen-printing plant and office headquarters building. Its variable rate: two percentage points above prime. The loan, which will be paid off by year-end, was a win-win: It kept Lepley from losing his business and Lepley's supplier from losing a customer.

YOUR ACCOUNTS RECEIVABLE. Independent finance companies that typically let you borrow up to 80% of the value of your outstanding receivables charge interest rates ranging from a stiff 14% to an astronomical 50% these days. By contrast, factoring firms actually buy your outstanding receivables from you, at a discount. You get most of the cash up front, while the factor assumes the hassle of collecting payment from your customers. The downside: To compensate for the risk, factors typically pocket 1.5% to 5% of your sales. Though it doesn't come cheap, such alternative financing is on the rise: Since 1988, factoring volume has increased 29%, hitting $59.5 billion in 1994, and much of that growth has come from small and medium-size businesses that have nowhere else to turn.

Stuart Newmeyer's Beverly Hills Cosmetic Group, a $3 million, nine-employee skin-care company in--yes--Beverly Hills, was one such business. Newmeyer explains the arrangement he has with two factoring companies. "If I get an order worth $100,000, the factor will give me about $75,000 up front, so I can produce my product," he says. "Then, as long as the account is paid within 30 days, he'll take out about 2% for himself and pay me the remaining $23,000." That's more than a bank might charge for a loan but, says Newmeyer, "If it allows me to grow, who cares?"

To find a company that buys receivables or makes asset-based loans, leaf through your Yellow Pages, under "Accounts Receivable Financing," "Money Sources" or "Factoring." Or call the National Association of Factoring Professionals in Orlando for referrals at 800-348-0157. You can also get a copy of the Edwards Directory of American Factors ($199), which has profiles of 200 factoring companies (800-963-1993).

VENTURE CAPITAL. In 1994, venture-capital firms poured nearly $5 billion into growing businesses, up 9% from 1993, reports the San Francisco investment research firm VentureOne. Roughly two-fifths of the money, however, went for later-round financings for established businesses, and the average amount invested was a hefty $5.3 million. The message: Venture capitalists are mostly interested in firms that have a solid track record and can offer them potential annual returns of at least 20%. And they're not hands-off owners: Most want a seat on the board of directors; often they'll also become involved in management of your company.

Still interested in finding a venture capitalist? If so, you might consider showcasing your company at a so-called venture fair, where venture capitalists and other investors gather to size up companies that have paid $50 to $350 to register for the event. Some 40 to 50 of these small business beauty pageants are now held each year, sponsored by a range of chambers of commerce, universities, state agencies and accounting firms. For information on such events, call the National Venture Capital Association at 703-351-5269.

Though most contestants in venture-capital beauty pageants are men, a handful of new venture-capital firms are being formed to nurture companies run by women. One of those is the Women's Equity Fund in Boulder, a two-year-old firm making investments of around $50,000, on average, in female-owned, Colorado-based businesses. Women's Equity Fund recently agreed to secure half of a $50,000 bank loan for Vanessa Jamison, 40, the founder of Denver-based Lube Serv Automotive. Lube Serv is a one-year-old company that provides lubricating and oil-changing services at a customer's home or place of work.

The loan guarantee permitted Lube Serv to qualify for a $95,000 SBA-guaranteed loan at another bank. For its risk, Women's Equity Fund will get a 2% stake in the company--and Jamison will get the money she needs to franchise the business next year. Which just goes to show: When it comes to raising capital, whether you're big or small, you need to know how to play the game.