From the June 2009 issue of Startups

With so many experienced, capable people getting cut loose by corporate employers, there has never been a larger pool of potential entrepreneurs. But with the implosion of so many banks and the continuing credit crunch, there has also never been a tougher time to find financing for a startup. So those looking to launch a small business have to be creative when looking for funding.

Fortunately, some places are still looking to help fund a business. There may be less of it, but the money is still out there. Here are a few nontraditional mattresses for you to look under.

Grants
How nice would it be to have money just given to you? One government website offers a great clearinghouse for hundreds of startup grants. These grants are offered by states and governmental associations, and the list promises to get bigger with all that stimulus money on the way. The grant process is generally not too onerous, and requires little more than a business plan and 10 to 15 pages of paperwork. And the rewards can be tremendous: Cool Energy Inc., a clean-power company in Boulder, Colorado, has earned three sizable grants since 2006, starting with a $100,000 Phase I Small Business Innovation Research grant from the National Science Foundation a year after the company was founded.

As much as the money itself, it's the prestige of earning a grant that can help a startup succeed. "It extends our runway," says Cool Energy president and CEO Sam Weaver, 43. "It's a tough time to get money now, and getting any kind of grant money makes you more attractive to investors."

If you're seeking grant money, Weaver recommends you cast a wide net around any grants you may qualify for, then try to develop relationships with the people who hold the keys. It can be a long process, so the time to start digging up any appropriate grants is now.

Business Plan Competitions
Several business schools hold competitions in which you can get your creative ideas in front of venture capitalists, angel investors and other potential financing sources--and the most promising business plans receive substantial cash prizes. The University of Texas at Austin sponsors the annual Moot Corp. competition, offering a package worth $75,000 to the winner. Others include the Massachusetts Institute of Technology 100K Entrepreneurship competition, and the Business Plan Competition at Harvard and the University of California, Berkeley. Most of those require student participation, but other members of the team can come from all over.

These university competitions have proved so fertile with ripe ideas that VC firms have started sponsoring their own. The WPI Venture Forum's Business Plan Contest, based in Worcester, Massachusetts, offers a first-place prize of about $20,000 to the top tech companies--startups included--in the Northeast. The Global Social Venture competition, run out of Berkeley, California, rewards businesses that address social or environmental concerns and awards a grand prize of $25,000.

Mridul Chowdhury, 32, was a Harvard graduate student when he headed up last year's MIT 100K group for a company that became Lexington, Massachusetts-based ClickDiagnostics, a health-care firm connecting under-served patients to medical specialists via mobile phones. "When we were entering the competition, we weren't even sure it would ever turn into a business," Chowdhury says. "The competition gave us the confidence to move forward."

And it provided his group with more than confidence: The company found its first project in Egypt before the competition was over. In the end, the $100,000 prize helped turn ClickDiagnostics, with Chowdhury as co-founder and CEO, into a thriving operation.

Microloans
If you can't convince a bank to give you a sizable loan to get your business going, maybe it's time to go the microloan route. Microloans, which are typically for $35,000 or less, got started as seed money for companies in emerging nations. But they've become popular in America as well, going to about 20,000 small-business owners a year, according to the Association for Enterprise Opportunity. They're available in every state except Alaska, Rhode Island, Utah and West Virginia.

Full-service banks generally don't make loans for less than $50,000, which makes microloans the province of a growing network of lenders. The largest is Accion USA, a nonprofit that has made more than $230 million in loans at an average size of $5,500 since it was founded in 1991. A list of 146 SBA-supported and approved microlenders is available on the SBA website.

Local Incubator/ Accelerator Groups
Typically public-private partnerships, these groups have sprung up around the nation, from big cities to places like Duffield, Virginia, and Arab, Alabama. Their core function is usually to offer loans to startups and early-stage businesses, but they also provide a crucial forum for networking, and bringing VCs and other investors to smaller entrepreneurs who wouldn't otherwise have access to them.

They provide more than just funds; many are constructed to help startups find their footing in their business plans as well. "In addition to providing capital, we have full-time executives in residence to fill the gaps in their business models," says Bob Coy, CEO of CincyTech, a seed-fund accelerator serving southwestern Ohio. (While an incubator provides both money and physical space for startups, an accelerator doesn't provide the office area.)

Their purpose is to develop the economy in their communities, so it may seem as if your opportunities are limited to your hometown. But Coy says that's not necessarily the case. He suggests that if your idea connects with the market and industry focus of another city (CincyTech focuses on IT, bioscience and advanced manufacturing) you might think about starting there. "If an entrepreneur was willing to move to southwest Ohio," Coy says, "we'd be willing to stick with them."

The National Business Incubation Association offers a directory of these groups, as does the National Association of Seed and Venture Funds.

SBICs
Small Business Investment Companies--set up by Congress back in 1958 to operate as private businesses---provide equity capital and long-term loans to small businesses, especially those suffering from social or economic disadvantages. More than 400 SBICs currently operate in the U.S., and they've been hatching companies for a long time; Apple, FedEx and Outback Steakhouse are all graduates of an SBIC program.

The recent stimulus bill made some changes in the regulations of SBICs that should help make these funds more available to a startup company. The percentage of funds that SBICs are now required to invest in smaller businesses has been raised from 20 percent to 25 percent. To find an SBIC near you, visit the website of the National Association of SBICs.

Traditional Funding
The most traditional way to get outside investors in your startup is by tapping friends and family. More than a quarter of all startups rely on these sources. And while the current economic downturn has left a lot of people strapped for cash, there's plenty of capital in need of investment. It may be a tough time to make money, but it's an easy time to convince Uncle Ned that putting his nest egg in your business is no riskier than buying into the S&P 500.

Tom Nawrocki is a freelance writer based in Centennial, Colorado, and the editor-in-chief of Triton Financial Newsletters, which produces editorial materials for financial advisory and other professional firms.