Finding alternative revenue streams is a necessity for business owners trying to weather the recession.

Kyle, Sarasota, Fla.
We’ve run a dinner theater for three decades, and make most of our money during the tourist season between Thanksgiving and Easter. The rest of the year our audience is local residents. We’ve been operating at a loss for the last couple of years, and are unable to get a bank loan. We own the land and the theater building, and have put them up for sale with no success. We even closed the theater for two months this summer to save money. We don’t know what to do.

By Coeli Carr, CNNMoney.com contributing writer
You're in a tough spot. A traditional lender won’t provide a loan to help you keep your business, and you can’t find a buyer to take it off your hands.

But there are upsides to your situation.

You own both the property and the building on it. Edward Indvik, a vice chairman in the investment services group of Lee & Associates in Los Angeles, suggests heading to your city’s planning department to find out the allowable uses of the building and property. Then look for ways to generate supplemental revenues from the space, especially during the non-peak season.

Some possibilities, says Indvik, are reaching out to companies that might be interested in using your space as a site for seminars or conferences. People might also consider getting married at the theater and hiring you to do the catering. Let the community know your site is open for other business, such as providing recital or practice space for other budding artists.

Joel Shulman, assistant professor of entrepreneurship at Babson College and an entrepreneurial finance expert, concedes that such measures will probably take you out of your comfort zone. But injecting fresh blood and ideas into your operation is essential. Invite local business leaders you respect in for a brainstorming session, enlist their expertise and partner up, he advises. “An alternative business model is something you must consider given the current economic market,” he says.

A partner who creates a complementary business on the premises could pay rent and give you a percentage of the take, says Shulman. Such a person could also act as agent and bring you clients who could use the space during non-peak season or during the day.

Another approach, says Shulman, is to do simple market research by asking local residents on your subscriber list what would inspire them to attend performances more frequently. Perhaps, he says, patrons would prefer to see only the show and would rather dine elsewhere. “It’s easy to lose money on a food business,” says Shulman, who cites spoilage, theft and labor costs as problematic issues.

If you eliminate the dinner, you might be able to raise the price of the theater ticket. By no longer serving a full dinner, you might attract a partner who’d want to set up a cafe or other type of eatery on your premises.

Increasing revenues in whatever way you can will make your business, even in a sluggish economy, attractive to potential buyers or lenders. With recent losses, your negative trend line is the worst thing to bring to a bank, says Shulman. However, non-traditional sources of loans are still available.

For instance, businesses that can't find bank loans can still apply online for loans from microfinance institutions like Accion USA. Premal Shah, president of Kiva, a global organization that helps people make loans to individuals in developing countries, also suggests visiting Prosper.com, a person-to-person lending site.

“It’s the eBay for loans,” he says. But first, try to boost your sales, he recommends. “It’s very attractive to a lender [if] you’ve found alternative revenue streams. It shows you’re a good entrepreneur.”

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Free cash for your business

Small business credit cards flourish as loans disappear

Rebooting your business model

Bank vaults have been slammed shut this year to small businesses, but entrepreneurs are pulling cash from other places to get their ventures off the ground.

Victoria Pavlov
In the past year, I made two attempts to take out a loan for my startup graphic design business. All banks demand proof that our business is successful and earned money for the past two years. I tried to make them understand that our business cannot bring in any money — we need equipment that can only be bought with a loan. If I get it, my company will create new job opportunities that will be beneficial for our economy. However, with that said, all banks remain ignorant. What is the best way to take out a loan for my business?

By Maya Payne Smart, CNNMoney.com contributing writer
Even in the best of economic times, it’s not easy for startups to win bank loans. Most lenders look for a long track record of earnings, and some don’t lend to new firms at all. But you can improve your odds by investing your own cash, building banking relationships, communicating a compelling business vision, and courting local investors.

Jeff Glassman (at left) relied on friends and family to raise the $250,000 needed to launch Fire Island Beer.

"No one should go into a bank and expect 100% financing," says Bob Seiwert, senior vice president of the American Bankers Association, a Washington, D.C.-based trade group. "Bankers are lending shareholder and depositor money, and they want it returned on time. They get paid to take prudent risks, but they don’t get paid to make equity investments."

In short, you need to invest in your enterprise before seeking others’ support. Seiwert also recommends seeking out an experienced small business lender who uses the Small Business Administration's loan guarantee programs.

"While most banks will do small business loans, not all banks specialize in that," he says. "Look for a bank with experienced relationship managers who are used to working with firms in your industry. Many times the advice that a knowledgeable banker can give you is far more important than any product or service that they can sell."

Moreover, establishing a banking relationship sets you apart from other prospective borrowers. "If you look today at who is getting the money, it’s people who’ve invested in a relationship and didn’t just do a series of transactions," Seiwert says. "They have a bank or a banker that they have regular dialogue with. If you’re applying for a loan over the Internet, you’re just going to be a number — and when money gets tight, you don’t want to be a number."

The good news is that small business lending is picking up a bit after plummeting last year. The SBA reported in September that more than 1,000 lenders that hadn’t made SBA loans since at least October 2008 began lending again this year.

But don’t think that traditional banks are your only option. Alex Moazed, founder of Applico, a mobile phone software application development firm, tapped into savings and maxed out his credit card to get his company off the ground in January. "I’m young and in school and don’t have much of a credit history," the Babson College student explains. "I didn’t think a bank loan was an option for me."

His firm launched its first application in May: NYC Transit, which allows New York and New Jersey commuters to view train, bus and ferry schedules on BlackBerrys without network connections. Just a month before the launch, he won $2,500 in a business plan competition at school. Now he says he’s paid off his credit card, and Applico is on track to reap $250,000 in revenue for its first fiscal year.

Moazed advises entrepreneurs to start small to generate cash for corporate growth. "Be relentless, and never let yourself get down about [financing your business], because there are many ways that you can be innovative to get your initial product out there," he says. "Maybe you want to spend $1 million on a full-fledged product, but scale it down to bare-bones and get that out there. Leverage the cash that you have and try to defer payment with your suppliers. Get them to buy into your vision."

When Jeff Glassman decided to launch Fire Island Beer in May with his brother and cousin, he knew their risk profile was unlikely to win traditional bank loans. Instead, he turned to friends and family to raise the $250,000 that he needed to perfect a beer recipe, purchase kegs, retool the bottling line at a brewery, and develop eye-catching creative for labels and advertisements. Glassman offered his investors convertible notes, giving them a direct stake in the potential success — and the risk — of his venture.

"Before you approach anyone else, sacrifice — whether it’s your own money or time," he advises. "Demonstrate that your skin’s 100% in the game. Investors look for that. They want to make sure it’s not a hobby that you’re testing on their dime."

A well-targeted personal appeal coupled with a detailed business plan helped Kim Harmson raise more than $70,000 from local investors when she launched Kizuri, a fair-trade gift shop in Spokane, Wash. "I had never done retail before, so I thought a bank would have laughed me right out of the door," she says.

What she lacked in experience, she made up for in commitment to socially and environmentally just business practices. That, along with her sponsorship of local events and donation of 7.5% of profits to the community, appealed to investors like Denise Attwood.

"Kim really impressed people," Attwood says. "She met individually with each of the investors and she was very thorough and thoughtful in her development of the plan. She knew her audience, and knew that they wouldn’t want fair trade not to be available in Spokane."

Give us your advice: Check out recent “Ask & Answer” questions.

How we got a loan

Love a local business? Buy a share

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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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Business grants: Sorting out the scams

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Environmentally friendly practices can help your business grow – and grants and low-interest loans are available to help.

John, Lynnwood, Wash.
“I'm looking to make my auto detail shop very green. Are there any government grants that I could get to convert everything to the greenest detail shop you've ever seen?”

By Kathleen Ryan O’Connor, CNNMoney.com contributing writer

Saving energy and reducing waste can have a powerful impact on any small business — auto detailing included.

But it can be expensive and difficult to convert to an all-green operation. Recognizing this, organizations and agencies ranging from your local utility to the federal government now offer a variety of incentives that can help, in the form of grants, loans or rebates.

Your local utility is the perfect first step. A quick check on the Web site of the Snohomish County Public Utility District No. 1 shows several rebate programs to help local businesses to become more energy efficient.

One, for energy-efficient lighting projects, will rebate 70% of the cost, or 100% of the materials cost if the project is self-installed, up to $7,500.

Another great place to look is the Database of State Incentives for Renewables & Efficiency, which has more than 100 listings for green grants, rebates and loans for Washington state alone.

Also check Business.gov, a Web site managed as a partnership by 22 federal agencies, for “green” business incentives. But as always, beware of grants that ask for money upfront and those that simply seem too good to be true.

You will also want to contact your local government-sponsored Small Business Development Center, a great resource for information to help your small business go green. Late last year, the Small Business Administration funneled $500,000 through business development centers in Idaho, Nebraska, Nevada and New York to help fund energy efficiency projects. Your local center might have similar options available.

The Washington state SBDC can be reached via Washington State University in Spokane.

Pamela Evans, the green business coordinator for Alameda County, Calif., helps businesses in her state adopt greener practices. Her program certified its first business in 1997 and now boasts 350 local “green businesses” and a waiting list of companies waiting to be considered for certification.

Even without a formal auditing or certification process in your area, small business owners can easily cast a critical eye themselves, she says. Look at your energy use, water use and waste volume. Few business owners realize that lighting can be as much as a third of their energy use, so it pays to go as energy-efficient as possible.

And it sounds obvious, but make sure you are in compliance with all existing environmental laws, Evans says.

“Say, for example, you are washing cars,” she says. “Most local governments will have regulations to prevent runoff into a creek.”

Thomas Rennie, founder and owner of AutoBella, a green auto detailing business in Portland, recommends starting with the front office.

“We just decided, me and my wife, to start treating our business like our home,” Rennie says.

They began ordering liquid products that come in corn-based, eco-friendly containers that compost easily. They replaced old, energy inefficient lighting and took advantage of an option to buy wind-based power from their local utility. Even the pens they use got an eco-friendly makeover — they are made from cardboard and wood. Today, AutoBella workers wear shirts made from bamboo fiber, an easily renewable resource.

They've since moved on to bigger-ticket items, including a major investment in a $15,000 water reclamation system.

“It’s expensive, but I’m getting a huge amount of business off of it," Rennie says.

He and his wife also committed to using biofuel instead of kerosene, a fix that illustrates how inexpensive some green moves can be. Switching to biofuel cost just $30, Rennie says, for a parts change on their high-pressure washer.

Just one warning, if you're on a diet: "It smells like french fries all the time," Rennie says with a laugh.

Give us your advice: Check out recent “Ask & Answer” questions.

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Grants for small companies are almost as rare as unicorns. Here's how to protect yourself against fraud.

Adriana Matteo, Warwick, R.I.
I'd like to start a small business and need a grant to start. How do I go about it and who do I need to contact? Everything seems to be a scam, but I know there are grants out there for young women who want to start a business.

By Kathleen Ryan O'Connor, CNNMoney.com contributor
You're right to be cautious – bogus claims of free money to start your business and shady outfits promising the moon are everywhere.

While legitimate grants for small business owners do exist, even for startups, they look very different from what you might encounter online. A typical Internet ad will promise thousands even if you don't know the difference between a balance sheet and a balance beam. Real government grants are scarce, tightly targeted toward specific industries, and rigorously competitive. If it sounds too good to be true, it probably is.

Getting a refresher course in that truism cost Donna Hartley of Tahoe City, Calif., a cool $2,500.

A survivor of a major plane crash, cancer and open-heart surgery, Hartley works as a motivational speaker. Interested in raising capital for her management company, Hartley scoured the Internet for leads. She found Grant Financial Network, and in August 2007, she gave the company $2,500 in return for detailed information on grants and assistance in securing them.

Grant Financial Network asked Hartley to authorize payment of the fee as a bank draft, rather than by mailing a check or paying with a credit card. That's a big red flag: Consumer groups warn that an ACH draft or wire transfer is the most difficult kind of payment to delay or dispute.

"Months and months pass," she recalls, with her calling repeatedly and not hearing anything. She eventually received some information from the company, but Hartley says it was nothing she couldn't have found out herself for free – and she never received any grant money.

When Hartley called to try to get her money back, the Las Vegas-based company instead tried to get her to part with an additional $6,500, for which it promised to help her turn her company into a 501(c)(3) charitable organization. The brazen pitch, she recalls, was about how that would make her eligible for even more grant money.

"I feel like I got taken to the cleaners," she says.

When we tried to call Grant Financial Network for a comment, the phone number listed for the company was disconnected. The Better Business Bureau of Las Vegas rates Grant Financial Network as "unsatisfactory." The bureau processed 26 complaints about the company in the last 12 months, mostly over refund issues and allegedly dishonest sales practices. More than half of those complaints went unanswered by the company.

Hartley, still the sole proprietor of Hartley International, has lodged her own BBB complaint, but doesn't expect to see her money again anytime soon.

"I know that grants can happen – I've written grant proposals for the Parent Teacher Association," she says. "It makes you feel very stupid."

John Miller, a spokesman for the Small Business Administration, says there is only one place to look for legitimate government grants: www.grants.gov.

"Speaking for the SBA, we do not provide grants to start or expand a business," he says. "The only grants the SBA administers are for research and development for high-tech companies through our SBIR/STTR [Small Business Innovation Research/Small Business Technology Transfer] programs."

Real grants have very detailed eligibility procedures. Take a look at the specs for this solicitation on grants.gov: "Eligible applicants for this program are non-profit, non-governmental organizations with a nationwide organizational infrastructure. … Applicants ideally should have state-level constituencies representing all states and territories, but at a minimum representing 20 members including both U.S. states/territories and international members."

Contrast that with this come-on from one of a dozen sites promising free money for your business: "None of these Grants require a credit check, collateral, security deposits or co-signers, you can apply even if you have a bankruptcy or bad credit, it doesn't matter. Its [sic] Free Money Never Repay!"

That said, entrepreneurs with great ideas, even if their business is in its infancy, can sometimes land grants, says Bo Fishback, vice-president of entrepreneurship at the Kauffman Foundation, a Kansas City foundation devoted to entrepreneurship. There are opportunities, but they are extremely competitive and often confined to science and technology.

"I don't know hundreds," he says, "but I know of a few."

The state of Missouri, for example, offers a grant for "Phase Zero" companies, which contributes $5,000 toward hiring a grant writer to help land a SBIR/STTR grant. "Those types of programs, state and federal, are in some ways the most obviously legitimate and recommended for startups to go after," Fishback said. "It's about as close to free money as you can get."

Angie Barnett, CEO of the Better Business Bureau of Greater Maryland, warns that now is a particularly vulnerable time for people to get taken in.

"After the holidays people are going to be grasping at every straw, and scam artists know that," she says.

To find legitimate resources for expanding your business, Barnett recommends visiting your local college- or university-based small business development resource center, or a nearby SCORE office. SCORE is a program backed by the SBA that brings together retired business executives and small business owners looking for guidance.

Your local economic development agencies can also point you toward financing resources. For example, your home state, Rhode Island, has a Web site at everycompanycounts.com with an online guide to organizations that assist local businesses. You won't find no-strings free money, but you will find loans available to new entrepreneurs. The Minority Investment Development Corp. is one local agency that focuses specifically on the needs of minority- and woman-owned businesses.

"People need to do their homework to be directed toward those [resources] which are legitimate," Barnett says.

Barnett has a list of warning signs that a grant offer is fishy:

-Grants are usually given to non-profits, and rarely go to small businesses for personal gain.
-The government – federal, state and local – does not make phone calls or send e-mails soliciting people to apply for grants. "If all of a sudden you start to get marketing or advertising, that's a tell-tale sign," she says.
- Be wary if you're asked to pay any kind of up-front processing fee. "One consumer reported they called it an ‘attorney's fee,'" Barnett says.
- If you're asked for your bank information, case closed: It's a scam. "They're fishing," Barnett says.
-Finally, don't be deceived by logos or graphics that appear to offer official endorsements. They're easy to fake, and can lend a false air of legitimacy.

Give us your advice: Check out recent “Ask & Answer” questions.

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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.

You can still cut back without shedding staff. Here's how.

Avery Wasoleck, Partner, Lane Office Furniture, New York City
When costs need to be cut, the first thought is often employee layoffs. Is there a more creative way for my business to achieve savings?

By Elise Reinemann, Fortune Small Business contributor
Layoffs, which can put a dent in company production and morale, are not as efficient as you may think. And the cost of severance packages and unemployment benefits can add up. So you're wise to pursue alternatives.

Steve Kane, managing director at Kane Partners in Hillsborough, Calif., suggests "spreading the pain." Instead of bidding your workers farewell, try cutting hours, the pay per hour, or compensation across the board. In fact, some employees may be okay with a reduced workweek that lets them temporarily trade money for time, says Pamela Brandes, associate professor of management at Syracuse University. They might welcome the chance to pursue other interests or care for children or elderly relatives. Brandes also advises rethinking your scheduling: Limit expensive overtime, ask employees to take extra, nonpaid vacation time, and don't fill vacant jobs.

Try to determine whether the dip is short or long term. Attracting a competent staff is expensive, Kane says. So if the problem is short term, it makes better sense to restructure temporarily rather than terminate employees permanently.

Layoffs can be especially trying for small businesses, notes Brandes, because they disrupt what are often close-knit networks of colleagues. Survivor employees tend to sympathize with departed co-workers and must struggle with increased workloads as they worry about their own job security. But if a layoff is inevitable, Brandes advises you to help your employees by putting the word out to business partners. A supplier or distributor might be looking for talented workers.
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A downturn can be a great time to become an entrepreneur – but only if you're prepared, financially and emotionally, to wait out the economic turmoil.

Charlene, Fort Myers, Fla.
I'm interested in buying a small pack-and-ship company. It's for sale for $70,000 with a gross profit of $245,000 a year. As an owner, after making all my bills and deductions, I would make about $60,000. My husband and I want to run it ourselves, with no employees, but we are worried: Is buying a business in the current economy a smart idea?

By Kathleen Ryan O'Connor, Fortune Small Business contributor
When Ken Proskie started his occupational health and safety consulting business in 2004, the economy was emerging from its post-Sept. 11 downturn, but downsizing and offshoring were still pummeling Main Street.

Proskie knew the problem too well: The impetus to strike out on his own came from being laid off after a 30-year corporate career in the field.

The economy seems even worse off now. What's his advice for someone pondering the same plunge today?

"It may sound philosophical, but sometimes a crisis is the biggest chance to find out who you really are," says Proskie, who lives in Evanston, Ill.

Convinced that his advance research was sound and that a clear need for his services existed, Proskie went in prepared to wait out the economy. He planned for a stretch of red ink before he'd see profits.

That approach was smart, experts say. Anyone thinking of starting a new business or taking over an existing one in late 2008 should keep that in mind and be prepared for a potential sales decline.

But above all, finding financing is going to be the top challenge. As banks pull away from lending to large, established companies, you can only imagine what they're telling unproven business owners just starting out.

That's not to say the dollar spigot is closed off completely, but the days of easy money are long gone. A strong personal credit rating is mandatory, but it won't be enough. Be prepared to front plenty of cash and collateral. Many entrepreneurs report that business loans are impossible to get unless they back them with their house.

"A few businesses that I've talked to over the last couple of weeks have had lines of credit canceled, even though they've been up to date on them," says Larry Bennett, a professor of entrepreneurial practice at Syracuse University's Whitman School of Management in New York. “That’s a little bit concerning to me, when even those with high creditworthiness are having problems.”

Still, there are opportunities. For those who come prepared, now can be a good time to launch – your rivals will be facing their own challenges and sales struggles.

"If you've done your homework and you see there is still an opportunity or a window of need, and your competition is not terribly with it, it can be a better-than-ever time," Bennett says. "But take the old saying: Take whatever you are forecasting for money [needed to get started] and double it. I'll say, take what you are forecasting for money and quadruple it."

Small business coach Jeff Williams of BizStarters, which specializes in the over-50 entrepreneur, warns potential entrepreneurs to be prepared, financially and emotionally, for a long stretch of economic turmoil.

"It takes footwork now and that eliminates a certain subcategory of buyers right there. This is not for the faint of heart," he says. "You are really going to have to look three years into the future. That's what smart buyers have always done."

One bright spot to consider: The economic crisis has some older entrepreneurs with solid businesses thinking it's a fine time for a graceful exit. And with the credit crunch, sellers might be willing to offer private financing.

Above all, Williams says, you need to take a long, hard look at the value of the business you're considering starting or buying. Does it fill a fundamental need?

Take industrial supplies. "Even if the factory goes from three shifts to two, they still have to buy these things," he says. "They still have to keep the plant running."

And don't be afraid to think outside the box. Even lawn care, a seeming luxury, can be a prosperous business in a downturn, Williams says. Downsizing means everyone is left working longer hours. Envision the suburban dad working from 7 am to 7 pm six days a week – he isn't going to be spending hours tooling around on the Cub Cadet anymore.

Sticking to the fundamentals was the key to Proskie's eventual success with his firm, Compass Health and Safety.

"The first year wasn't great," he says. "I had to have the resources behind me to survive [that initial loss] in income. I tried to position myself smartly. Why would you want to use me – a small fish in a big pond? I marketed myself as a seasoned professional and, probably more important, was the value proposition. I can do it for less, with better quality and better service than you've gotten in the past."

Eventually, that approach built up his client base. After all, even in a recession, work still has to be done.

One key thing to keep in mind: In any business climate, boom or bust, you can't let your emotions get the best of you.

As Bennett puts it: "I tell my students, fall in love with business, just don't fall in love with the business."

QUIZ: Are you ready to start your own business?

If your business is in a target zone, don't miss out on the benefits.

Ros Borden, Miami
My wife and I own a convenience store in a federally designated enterprise zone. We have eight employees and we have owned the store for two years. We are struggling to stay afloat and to hold onto our employees. Can you get us information on how to use this designation to benefit us and our employees? I have already cashed out my retirement money. If we can’t get help, we’ll have to put eight people out on the street.

By Kathleen Ryan O’Connor, Fortune Small Business contributor
Dear Ros: Enterprise zones can offer a powerful array of incentives and tax benefits, but even the best leg up can’t save every business, especially in an economic downturn.

That said, there’s still plenty you can do.

Nearly all of the experts we spoke to say small business owners in an enterprise zone rarely take advantage of all the benefits available to them. That’s not too surprising given the complexity that accompanies some zone designations, which came out of a push in the 1980s to encourage economic activity in depressed areas. In addition to federal benefits, nearly every state has its own enterprise zone programs.

Typically, the programs will feature a mix of state and federal tax reductions, employee-based hiring credits, low-cost loan programs and, sometimes, subsidized marketing opportunities. Earlier this fall, small business owners in San Pedro, Calif. even used their enterprise zone designation as an argument to fight a steep hike in parking meter fees.

In your area, Miami-Dade County, benefits can include a 50% reduction in the sales tax on electricity for up to five years; a job tax credit of between 20% and 30% of wages paid for new jobs for enterprise-zone residents; a 97% reduction of sales tax on business equipment and building materials up to $10,000; a corporate tax credit of 20%; a credit of 96% on ad valorem taxes (a tax based on the value of real estate or personal property) not abated by local governments, and more. The benefits even include a 50% credit on contributions to local community groups.

If you haven’t already, call the Miami-Dade County office of Economic Development. They can refer you to helpful resources. Also, the Small Business Administration offers free small business counseling at its SCORE centers. There’s one right in Miami at 100 S. Biscayne Blvd.

At the same time, experts urge you to talk to an accountant who specializes in enterprise-zone tax benefits. Not every accountant is well-versed in current state and federal enterprise-zone benefits and boundaries, which can change over time. This is no time for Uncle Manny to do your taxes.

In 2003, for example, a year California gave away $300 million in tax credits, less than 10% of potentially eligible businesses actually claimed them, says C & I Tax Consultants, an accounting firm that specializes in tax credits.

“There’s absolutely no reason not to look into this,” says Steve Dotan, president and CEO of the Los Angeles company.

And just because you missed the boat on past credits doesn’t mean that the benefit is gone forever. Most states will allow you to go back several years on returns and amend the information, something Dotan says will often uncover plenty of unused credits that are still available.

“I get a lot of, ‘Wow, really?’”

Plus, some credits are refundable, he says, meaning that if you are struggling and not paying taxes, you can actually get cash back.

Louis Andrianos is a powerful example of how an owner can transform a once-struggling business with enterprise zone incentives and a lot of sweat equity.

He and his father took over a shuttered, failed restaurant in the Roselle, N.J., Urban Enterprise Zone more than 20 years ago. With the help from the zone’s benefits, they expanded the business through the years from a modest but successful diner to a full-service restaurant, banquet and lounge facility.

A lot of things had to come together to make it work, says Andrianos, who runs the business with his father, George Andrianos, and brother-in-law Angelo Vayas, but the UEZ credits were critical, including the ability to make large capital investments tax-free.

Co-op marketing opportunities were particularly helpful, Andrianos says. Ask around to see if any are being offered near you. By bundling advertising for the Roselle UEZ businesses together, they were able to reach a far wider pool of customers.

“Like anything, there is no magic,” he says. “You really have to put your time in and make your contacts.”

Roselle UEZ director Harry Wyatt offers this advice for any enterprise zone business that may be struggling:

— Know where your business is coming from. Who is doing the buying and what are they buying from you? Many business owners are guilty of stocking their store with items they may use and enjoy themselves, but will their customers like them? Just as you keep meticulous records of who owes money to your business and who your business owes money to, you should keep a close watch on which items you’re selling and which items you’re not. Moving merchandise isn’t guesswork; it’s a science.

— Advertise to your target customer base. Word-of-mouth can be very powerful, but it’s not very consistent. New businesses that come in and decide they’re not going to do any advertising are really taking a shot in the dark. They don’t know who they want to market to and they don’t know how to reach them.

— Take advantage of networking opportunities. Being part of a UEZ is a license to network shamelessly with other business owners. Roselle has a monthly luncheon for business owners to meet with each other. This often results in new partnerships between local businesses, allowing both parties to save money. Tie your business into the community it serves and you will be rewarded.

Internet databases can get you off to a good start, but be prepared to hire someone to help to narrow your search.

Tyler Lowe, St. Louis
I would like to buy or become a controlling partner in a small/medium size business in the St. Louis area. How do I find businesses that are either for sale, or that have owners who would be willing to discuss a sale? My broker (with a huge financial services firm) has not been able to generate many leads.

By Lenora Chu, Fortune Small Business contributor
Dear Tyler: First, you’ll need specify what kind of business you’d like to purchase. You’re likely to be more successful if you target an industry where you already have knowledge and expertise, say the experts.

“If doesn’t matter how much money a person has or how smart they are, there will always be a learning curve,” says Terry Monroe, president of the St. Louis-based brokerage firm American Business Brokers.

Starting somewhere familiar will help. And being very specific will help you narrow your search.

You could start compiling a target list by consulting an online database such as BizBuySell.com or BizQuest.com, says Mark Pittman, managing director at the Los Angeles-based investment bank Grandview National Inc.

These sites list more than 50,000 businesses for sale, and searches can be filtered by industry, state, county and city.

You can also research and target businesses that are not on the market and approach the owner directly, Pittman says. Should the owner be interested in selling, you may be able to negotiate a deal without competing with other buyers. Trade associations can help you identify specific businesses within an industry. Or try consulting Dunn & Bradstreet’s database of business records.

If you employ a broker to help you, you should use a firm that focuses solely on buying and selling businesses, says Monroe. They will know what’s available in your market and be able to perform searches according to your criteria.

However, Pittman warns that you should be wary of brokers who show buyers only businesses they already represent.

One high-end option: Consider also hiring an investment bank that specializes in the industry you’re interested in. Although it’s generally only cost effective to hire investment banks if you’re buying a business in the $10 million an up range, a number handle deals as low as the $1 million mark, Pittman says. Like brokers, investment banks will handle the work of contacting potential sellers for you.

Joanne Carine, Bayonne, N.J.
I am 23 years old, am a hairstylist and the owner of my salon is going to sell the shop next year. I would love to buy the shop and would need a small business loan. I have been a hair dresser for 3 years. I live with my parents but financially they cannot help me purchase the shop for $150,000. Should I borrow the money or wait until I am older and have more experience?

What do you recommend? Leave a comment below with your answer.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Securing small business loans in a melting economy

Where to find funding to expand

Credit crunch hits small businesses

Small business credit crunch: In their own words

Leonard, Russellville, Ark.
For four years I was production manager of a business which is now up for sale. I want to buy it. This business never showed a profit until I took over, then made money 2004-2008, while I worked there. I don't have the money/credit to buy it, and I have been seeking out investors who would be willing to help me based on my track record as manager. Would appreciate any advice or input.

What do you recommend? Leave a comment below with your answer.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Securing small business loans in a melting economy

Where to find funding to expand

Credit crunch hits small businesses

Small business credit crunch: In their own words

Dayzon Johnson, CEO, Ice Cold Music, Clarksville, Tenn.
I own an independent record label that I started two years ago. It's growing quickly, and I'd like to get a bank loan to help me expand. But I have a bankruptcy on my personal credit record. Will this make it impossible for me to get bank credit for my business?

By Anne Fisher, Fortune Small Business contributor
Dear Dayzon: Not necessarily. "Bankruptcy used to be the financial equivalent of a scarlet letter," notes Jim Lynch, CEO of Leaders Bank in Oak Brook, Ill., which lends almost exclusively to entrepreneurs. "These days we're more willing to listen."

He notes that a recent Harvard study shows that catastrophic medical expenses are the top reason for personal bankruptcies in the U.S. "These could befall anyone, so a bank is unlikely to hold them against you. But if the bankruptcy resulted from poor judgment" – an ill-advised shopping spree, for instance – "I'd probably take a pass."

David Waltzer, a New York City bankruptcy attorney, says that a bankruptcy is "like a loud noise – a big jolt with echoes that fade in time." He says that many people erroneously believe bankruptcy will ruin their credit forever. "By law, the maximum time that a bankruptcy can stay on your credit record is ten years, but the credit agencies will often expunge it long before then," he says. "If your income is steady, you've kept your debt low, and you're paying your bills on time, banks may be willing to lend to you." So why not apply?

If banks balk, consider alternative financing sources. "If the business is growing and you can show two years of solid financials, a small equity investor may be willing to overlook a past personal credit problem," says Rick Singer, CEO of RaiseCapital.com.

Singer's firm in Port Washington, N.Y., is among a growing number of companies that connect small-business owners and investors. Gobignetwork.com and fundinguniverse.com are two other options.

"Disclose your credit problem, but wait until a potential investor has gotten to know your business and shown interest in it," he says. Of course, you would need to give up some equity to attract outside investors. But for a well-timed capital infusion, it might be worthwhile.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Should I file for bankruptcy?

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Before courting investors, make sure you prepare your pitch.

Dan Henderson, Houston
Our company is growing very rapidly – sales should exceed $40 million in 2008, up from $11 million in 2005. Though we've had the funds to acquire smaller companies, our latest acquisition required some creative financing, and it's becoming clear that the next phase of growth will require additional capital. What is the best way to draw interest from private equity firms?

By Myrlande Davermann, Fortune Small Business contributor
Dear Dan: Sometimes a business can grow so quickly, its owners forget they're no longer running a startup. Jeff Henningsen, an executive with the Association for Corporate Growth's Houston chapter, says your company is on the verge of entering a new arena – so it's time to play big. Henningsen suggests hiring an investment banker, who can help you raise capital and guide you through sales and acquisitions.

“A banker will expose your company to the world of private equity in a way that no owner can,” he says. “It will also allow you to remain focused on growing your business.” Financial advice can be expensive, but, given the resources you already have, it's a necessary cost.

Whether or not you hire a banker, you'll need to take steps on your own to prepare your pitch to investors. Emily Mendell, vice president of strategic affairs at the National Venture Capital Association (NVCA) in Arlington, Va., says you must have a comprehensive business plan in hand. The write-up should include an industry and market analysis, financial projections, and a thorough competitive analysis and global strategy.

Once your plan is complete, you'll be ready to begin the search for investors. Mendell suggests starting with word of mouth. Ask around to find out who's investing in what sectors. John Taylor, a research and financial affairs executive at the NVCA, says you should look for keynote speakers and panelists at industry conferences. Active firms that are looking to invest in companies such as yours will send representatives. You can also purchase an NCVA directory, which lists firms by their investment concentration.

Taylor and Mendell advise you to make sure that venture capital firms are interested in your field of business before you approach them.

“The due diligence process can take several months,” Mendell says. “But it's very important – both the company and venture capital firm need to be confident that they've made the right match.” She suggests that you look for a firm that has a similar culture and vision to yours. Venture capital and private equity firms will become highly involved in managing your company, so it's important to ensure that you click before hooking up.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

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Resources for raising money

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Michael Andrews, Integricy.com, Groton, N.Y.
My company is trying to get funding; however, we are still waiting – and have been for six months. We only need about $500K to start, and our projections for years five and six are over $18 million, which we are being told is way too low. Why do I keep getting rejection letters from hundreds of firms that keep saying they only fund $1 million or more?

What do you recommend? Leave a comment below with your answer.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

How do I assure customers I'm not going broke?

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Before courting investors, make sure you prepare your pitch

Dan Henderson, Houston, Texas
Our company is growing very rapidly – sales should exceed $40 million in 2008, up from $11 million in 2005. Though we’ve had the funds to acquire smaller companies, our latest acquisition required some creative financing, and it’s becoming clear that the next phase of growth will require additional capital. What is the best way to draw interest from private-equity firms?

By Myrlande Davermann, Fortune Small Business contributor
Dear Dan: Sometimes a business can grow so quickly, its owners forget they’re no longer running a startup. Jeff Henningsen, president of ACG Houston, an organization for professionals involved in corporate growth, says your company is on the verge of entering a new arena – so it’s time to play big.

“In order to grow the next level, you can’t do things the same way you did before,” he says. Henningsen advises you to hire an investment banker, who can help you raise capital and guide you through sales and acquisitions. “A banker will expose your company to the world of private equity in a way that no owner can,” he says. “It will also allow you to remain focused on growing your business.”

Financial advice can be expensive, but it’s a necessary cost.

Whether or not you hire a banker, you’ll need to take steps on your own to prepare your pitch to investors. Emily Mendell, vice president of strategic affairs at the National Venture Capital Association (NVCA) in Arlington, Va., says you must have a comprehensive business plan in hand. The write-up should include an industry and market analysis, financial projections, and a thorough competitive analysis and global strategy.

Once your plan is complete, you’ll be ready to begin the search for investors. Mendell suggests starting with word of mouth. Ask around to find out who’s investing in what sectors. John Taylor, a research and financial-affairs executive at the NVCA, says you should look for keynote speakers and panelists at industry conferences. Active firms who are looking to invest in companies such as yours will send representatives. You can also purchase an NCVA directory, which lists firms by their investment concentration.

Taylor and Mendell advise you to make sure that venture-capital firms are interested in your field of business before you approach them.

“The due diligence process can take several months,” Mendell says. “But it’s very important – both the company and venture capital firm need to be confident that they’ve made the right match.” She suggests looking for a firm that has a similar culture and vision to yours. Venture capital and private equity firms will become highly involved in managing your company, so it’s important to ensure that you click before hooking up.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

How much equity do my investors deserve?

Venture capital 101

How to get capital for your first business

To rent out empty rooms, turn to local media and Craigslist.

Sherri Birdsall, Gensis Medical Education Consultants, Orange, Calif.
I work for a business that teaches continuing-education courses for nurses in Orange, Calif. Most of our classes are conducted on weekends, which means two beautiful classrooms sit completely unused most of the week. I’d like to rent them out to bring in extra money. Any suggestions on where to start?

By Kathleen Ryan O’Connor, Fortune Small Business contributor
Dear Sherri: If you’re planning on playing the role of part-time landlord, you might be tempted to contact a professional for help. But Adam Brett, a realtor with RE/MAX NOC in Fullerton, Calif., says that if the space you’re renting is small, you’re best off doing it on your own.

Instead of trying to discern who might need an empty classroom during the week, put the word out and let renters find you. Posting the opportunity in local media outlets and community forums will help you cast a wide net for tenants. You should also consider putting up fliers at gathering places such as the public library.

If you decide to go the newspaper route, contact the Foothills Sentry, a biweekly newspaper that publishes exclusively in your area and sells space for advertisements. A good-sized display ad costs just $17, while a straight classified posting costs $5 per line. The publication goes out to about 45,000 single-family homes.

Another option is the Orange County Register, a large daily newspaper. The Register has a much greater reach than the Foothills Sentry – the average weekday circulation is about 250,000 copies – but all those extra eyeballs will cost you. A five-line classified ad that runs once on Sunday and online all week goes for $119, or $160 for two days.

Newspapers and libraries are good forums for advertising rental space, but your best option, says Brett, could be Craigslist. Posting an ad in the “office/commercial” section of the site, which is listed under “housing,” is completely free. Brett also advises you to look for other posters on the site who are trying to rent similar properties (you can enter terms such as “classroom” in the search space to find these ads). E-mail them to see if they’ve had to turn away any interested parties, and ask them to pass along your contact information. Many Craigslisters would be happy to help.

While California real estate is still taking a hit, “the lease market remains very strong,” says Brett. With a small amount of effort, you stand a good chance of finding a tenant who’s looking for a classroom of his or her own.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Switching personal assets to business assets

Real estate survival guide

Entrepreneurs profiting from real estate

A look at how federal law defines the most desirable financial contributors.

Ellison Long, Atlanta, Ga.
Does an individual employee who wants to invest in our soon-to-be-established LLC need to be an “accredited investor"?

By Shara Rutberg, Fortune Small Business contributor
Dear Ellison: The short answer is no: An employee does not have to be an accredited investor to be part of an LLC.

"Accredited investor" is a federal securities-law term.

“Without getting technical, accredited investors are company insiders and rich people,” says David Sokolow a senior lecturer at the University of Texas at Austin School of Law whose areas of expertise include corporations and contracts.

“Accredited investors are considered to be better able to bear or assess the risk associated with investments, because they are generally either wealthier investors or individuals with access to more information about the company," says Esther Barron, assistant director of the Small Business Opportunity Center and clinical professor at the Northwestern University School of Law. "Sometimes the restrictions for raising money may be less burdensome when you’re dealing with them."

The exact regulations vary; when determining whether an employee must be an accredited investor to invest in your company without violating any laws, Barron says the things to consider include your state’s securities laws, federal securities laws, how much money you’re raising, how much money you’ve already raised, how many investors you are targeting, the documents you’re providing to your investors, and what type of filings you’ve completed.

Disclaimer: This column provides general information only and is not intended to replace the services or legal advice of an attorney or CPA. Always consult a lawyer or accountant regarding specific legal or financial issues.

Give us your advice: Check out recent “Ask & Answer” questions.

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Tax ins and outs of real-estate investments

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Venture capital 101

Michael Stewart, Clinton, Mo.
I am creating an Internet cafe/ISP/IT consulting company called CyberNation USA. I have been trying to find a business partner that I can really trust to help me expand my business. I can't seem to find people with as much drive and determination as I have. I want to start offering stock as capital, but I'm afraid it will grow faster than I can handle. I really do need some advice. Am I way too pushy, or not aggressive enough? What am I doing wrong?

What do you recommend? Leave a comment below with your answer.

Give us your advice: Check out recent “Ask & Answer” questions.

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Should this owner seek out international investors to grow his business?

Jean Luc Gaudry, Los Angeles
I have a unique music Web site on which one can find listings of shows, bands on tour, clubs and venues. I have two questions. I am looking for some investors – what are the biggest mistakes entrepreneurs make when they decide to add an investor to their company? Also, I want to set up a company in Europe and eventually have my Web site branch out all over the world. Is it better to have different investors on each continent?

By Myrlande Davermann, Fortune Small Business contributor
Dear Jean Luc: “Having investors in multiple continents is the last thing you want to do,” says Jim Beach, director of InternationalEntrepreneurship.com.

He cautions that as an entrepreneur you will lose some control of your business – and , potentially, some of your creative freedoms – if you relinquish partial control to investors. Beach, a former entrepreneur himself, says the biggest mistake he has seen entrepreneurs make is giving up too much control.

“Sometimes, it is better to grow small and slow,” he says.

To help you strategize for breaking through to international markets, Beach recommends hiring a college student whose task is research the international potential of your Web site. “Why have expensive talent, when you can have passionate talent?” he says. He also suggests going on Facebook and Craigslist to scout out young talent eager for music-industry opportunities.

“Investors are looking for a proven business model,” Beach says.

His advice: “Make the U.S. profitable before you branch out internationally.”

Raj Khera, co-founder and CEO of More Business.com adds: “Investors will want to know how your company meets a demand and how their investment will grow. Regardless of their location, you should seek 'smart' money."

Smart money, as he defines it, is an investment from people who know your space and can open connections and channels to help you grow.

Give us your advice: Check out recent “Ask & Answer”questions.

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