For retailers that don't want the overhead of stockpiling merchandise, drop shipping can be a cost-saving option.

Mike, Queens, NY
I started a home-based wholesaling business six months ago and got four credit cards totaling $18,000. I was scammed out of $10,000 and invested another $4,000 into a Web site and advertising. Now my cards are almost maxed out, and I need the cash or credit to purchase merchandise. Business people tell me it takes a few years before turning a profit, but I've worked like the devil these past six months to finally get the contacts and deals I've been searching for, only now I don't have the cash or the credit. Is there anything I can do?

By Kathleen Ryan O'Connor, CNNMoney.com contributing writer
Starting a business from scratch takes time and an incredible amount of energy – and setbacks are inevitable. It can feel like you're knocked two steps back for every step forward.

Lacking working capital is going to make it even harder, unfortunately. Credit markets have grown extremely tight, and the fact that you're using nearly all of your available credit lines pushes down your credit score, which makes you a less attractive candidate to the banks for extending further credit. That's never ideal, but it can be the kiss of death today, when even people with pristine FICO scores and very little debt are finding it difficult to find decent lending options.

So what to do?

One option is to take a break from working on your business full-time and find an outside job that will let you pay down debt.

But if you want to keep forging ahead, you could approach the suppliers you've already lined up and ask if they will open an account for you to buy on their credit terms. That may be tricky: When you run a credit check, you might not rate as a good risk.

Another option is for you to start an account with a drop shipper. Drop shopping is a "buy-as-you-go" model under which you advertise the merchandise, sell it to the customer, and then, after the buyer's money arrives, you complete your purchase of the requested products from the drop shipper, typically via credit card. The shipper then mails the purchased items to the customer on your behalf. The transaction is generally invisible to buyers: Drop shoppers offer a variety of arrangements, from plain boxes to packaging decked out with your logos.

Drop shipping isn't a new concept. One of the few studies on the practice, published in the journal Management Science in 2006, found that about one-third of Internet retailers rely on drop shipping to fulfill orders.

"Early on, there was a lot of hype around drop shipping," says Serguei Netessine, an author of that study and an associate professor of operations and information management at the University of Pennsylvania's Wharton School of Business.

The initial idea was that drop shipping would be a one-size-fits-all "panacea" for e-tailing. That hasn't panned out. In its early days, even Amazon.com (AMZN) used drop shipping, but the bookselling Goliath soon realized the practice wasn't a good fit for the volume of business it was doing. Amazon instead committed to buying its own inventory and building warehouses. It now offers its own drop-ship service to smaller retailers, Netessine says.

"That's kind of a natural evolution," he says.

Among the downsides of drop shipping: You are introducing a middleman into the transaction, the drop shipper, who has to make their own profit, so your margin is going to be smaller than if you acted as the wholesaler yourself. On some products, the profit margin is already so low that drop shipping makes it extremely difficult to make any money at all.

Another challenge: Drop shipping scams are all over the Internet. Key red flags include recurring monthly fees or difficulty in getting a live person on the phone. Try to hit a trade show. If a drop shipper has a booth there, that's probably a good sign. Several Web sites help connect online merchants with drop shippers and wholesalers; WorldWideBrands.com is one example.

And since your shipper will be packaging and shipping merchandise under your name, be certain to pick one that demonstrates a commitment to the same quality and customer service you'd want your customers to expect of you.

Also take care to thoroughly note your shipper's policies on backorders, returns and lost shipments. Chronic problems in order fulfillment have destroyed many a small business, online or not, and savvy consumers used to Amazon or Zappos boxes dropping on their doorstep a day after they've clicked in their order will not look kindly on poor or slow service.

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"Factoring" can be a godsend for growing businesses that need to smooth out their cash flow. Here's what you need to know about it.

Gary, San Jose
Can you recommend a reliable factoring company? Is there any factor company that can work with us to invoice our clients using our name, so that our client doesn't know we've factored our receivables?

By Kathleen Ryan O'Connor, Fortune Small Business contributor
First, a bit of background on the practice. Factoring is essentially selling your accounts receivable in exchange for cash up front. You get a percentage of the value of your invoices, say 70% to 90%, now instead of 30 or 60 days out.

In exchange for the quick liquidity – some factors can get you cash in just 24 to 48 hours – you pay a fee that can range anywhere from 1% to as high as 15%. When your client pays the factor, they keep the amount they've advanced you and send you the balance.

The practice has come a long way from its past image as something reserved for businesses with bad credit. Rapidly expanding but cash-starved startups and companies forced to wait a long time for payments from solid clients are particularly well-suited to take advantage of the practice.

The downside is that factoring can be more expensive than a traditional lender – think of it as more akin to a credit card than a bank loan – and in small-margin businesses, the cost of factoring can cut too deeply into profits to make it sensible.

"Factoring is very good when your business is growing, but it’s not a savior for a dying business," says Scott Applegate, COO of CapitalPlus Equity, a factoring company out of Knoxville. "All it would do for a dying business is prolong the death."

Dave Theobald, a critical-care nurse who founded his own medical staffing firm for nurses in 2004 in Clifton Park, N.Y., Stat Staff Professional, says the factoring relationship he established with Anchor Funding Services was crucial to the his business's growth.

As a staffing firm, his company's single biggest expense is payroll – and its payments largely come from hospitals, which are notoriously slow to cut a check. In two years, his monthly payroll grew from about $10,000 to $2.3 million. Factoring allowed him to meet his cash-flow obligations and to keep expanding, he says.

It's a great time to be in the factoring business. As the financial crisis continues to squeeze credit markets, small business owners are left looking for new avenues to raise cash.

"Business is up," Applegate says. "Typically when banks tighten up, our business – or at least the business opportunity – gets better. But when that happens, there are a lot of people who are fraudulent looking to get into the business." Factors also report seeing a jump in bogus invoices in tough times.

The Commercial Finance Association, a trade group, says U.S. factoring is enjoying strong growth. Their most recent survey shows U.S. factors had a transaction volume of $135.3 billion in 2007, up 6.5 % from the $127.6 billion they did in 2006. That figure represented a nearly 13% increase from the year before.

Another reason small business owners may like factoring is that the factor can essentially function as an outsourced accounts receivable and collections department, freeing the owner to concentrate on other aspects of the business.

The credit of your clients will play a major role if you contract with a "non-recourse factor," one of two types of factoring companies and the most prevalent. Non-recourse factors take on all the risk if an invoice is not paid, which gives the business owner some shelter from the risk – but they change more for the service. "Recourse" factors, which have lower fees, do not assume that risk. If your client doesn't pay up, you'll have to repay what you've been advanced.

Dealing with credit and payment issues can be a huge burden for a small business owner. When you consider that a factor takes over that work, factoring can be cheaper than a bank, says Kevin Gowen, CEO of AmeriFactors Financial Group in Celebration, Fla.

As for recommendations, we can't single out a company, but Bert Goldberg, executive director of the International Factoring Association, says his group offers its membership database to the public and that those who join sign an ethics pledge. You might also want to check with the Better Business Bureau for any complaints against a factor you're considering.

As for whether or not you can make it seem like payments on factored invoices are still coming back to you, the short answer is, it depends. The companies we talked to are happy to work with clients on such issues, but in general payments will go to a P.O. Box accessed by the factor. Some companies tout their ability to make their role invisible, billing customers under their client's name.

It's both a science and an art, experts say.

Ibiam, Nigeria
How can I create an attractive package for my soap and deodorant product?

By Kathleen Ryan O’Connor, Fortune Small Business Contributor
Dear Ibiam: It may sound like you’ve already done the hard part – creating a product you feel is ready to hit store shelves. That’s an accomplishment to be sure, but it’s only the beginning.

Packaging a product correctly and attractively without breaking the bank is harder than it looks, says Karen Proctor, a professor of packaging science at the Rochester Institute of Technology – and it’s something 99% of small-business owners fail to consider properly.

Take the woman who came to her to help find the right package to ship her locally famous cheesecakes. Poor packaging was turning the eager entrepreneur’s dreams of becoming the next Mrs. Fields into a nightmare. Half of the cheesecakes she shipped arrived damaged.

“Customers just sent them back,” Proctor says. “It was really sad.”

Where to start? First, do your homework. Especially for personal-hygiene products, there will be certain regulations you must follow. The last thing you want to do is order a huge lot of packaging only to find you haven’t followed legal disclosure requirements for ingredients. Another consideration: Your packaging needs to be sturdy enough to get the products safely to vendors.

“What I recommend is to always survey the market and see what the competition is doing,” says JoAnn Hines, also known as the "Packaging Diva."

“The biggest issue you’ll face is finding a vendor who can supply in small quantities,” Hines says. Custom-designed packaging runs anywhere from a minimum order of between 10,000 and 100,000, which is not at all where a small-business owner should start.

Next step: Once you’ve figured the type of packaging you need, find out what it’s called in the industry and start a Web search for vendors. Both Hines and Proctor note that the Internet is the best source for finding vendors who can specialize in small quantities. Hines recommends starting with as little as 25 units.

“I always encourage people to do their research and do their homework and come up with something they are happy with, but don’t go overboard tweaking every final detail. It’s probably going to change,” Hines says.

And cash-strapped upstarts shouldn’t be afraid to use their creativity, says Hines, who recently gave a speech to a group of soap-making entrepreneurs in Vermont titled, “Got Soap? How to package it simply, effectively and within budget.”

Are you selling something that everyone else is packaging in a typical glass jar? Go with a beautiful tin. A rudimentary search found one promising packager, Brambleberry, selling plain plastic soap pumps for as small a quantity as 1 bottle for a $1.10 or a case of 315 for $141.75.

Proctor stresses the benefits of plain packaging combined with customized labels. “That’s one of the big things to keep your cost down,” she says. The label itself can be expensive upfront, but you apply it as needed and it can be changed far more easily than, say, 500 preprinted corrugated boxes with a logo that just isn’t working.

And speaking of secondary packaging, Proctor warns this is another area that can get tricky. Most small-business owners will be using UPS or FedEx-type carriers to get their product out, so they must spend time and attention on make sure it arrives in pristine condition.

“Product damage is serious,” Proctor says. “No one wants a dented carton of bar soap.”

And the product must be able to travel inside the packaging: Proctor cites a Boston woman making natural lip balms. The product was great, Proctor says, but its softness couldn’t hold up to the varied temperatures it faced as it went through retail shipping chains. In short, a lot of lip balm melted and the woman had to go back to the lab to make her product more solid.

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