Karen Zebulon recently wanted to buy an attractively-priced collection of back-to-school and women’s clothes for her Brooklyn boutique, but she lacked the cash to make the big purchase.

Hoping to avoid the hassle of a traditional bank loan, Zebulon turned to an alternative funding option: a merchant cash advance. The advance gave her a portion of her future credit card sales up front so that she could make the purchase right away and sell the clothes at a decent mark-up.

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Zebulon, who owns a boutique called Gumbo, said business owners need to move quickly when they see merchandise they want. “Seasons are short and you need to jump in at the right time.”

As the credit crunch has made small business loans more elusive even for credit-worthy companies, merchants are increasingly turning to other forms of funding to keep their restaurants, stores and tech companies growing.

According to the Federal Reserve, banks have continued to make it tougher for small businesses to obtain loans this summer. A new Fed report shows 65% of lenders surveyed in August have tightened their lending standards for small businesses.

The tougher lending standards have understandably weakened small business sentiment. The small business optimism index from the National Federation of Independent Businesses fell last month to its lowest level since 1980. The same survey showed that the number of companies saying credit is harder to get has reached the highest level in 15 years.

So where are small business owners turning for cash?

In addition to a merchant cash advance, there's also venture debt, leasing offers and the traditional friends and family route.

“Today it’s extremely difficult to get money from your bank, so alternative financing methods are really being forced on small business owners. They have to be creative to go after these non-traditional methods,” said Doug Williams, a small business consultant based in Vancouver, Wash.

As small business lending has slowed for banks during the past year, business has jumped by about 75% for AdvanceMe, the company that gave Brooklyn’s Zebulon a merchant cash advance.

“We are getting a lot of customers who used to have credit access from their banks,” said Mark Lorimer, chief marketing officer at AdvanceMe.

Instead of using collateral and relying heavily on credit scores like banks, AdanceMe fronts a portion of a business’s expected credit card sales. Also, unlike a typical bank loan, there is no deadline by which the cash advance needs to be paid back. Instead, a percentage of the credit card receipts is subtracted until a predetermined premium on the advance is reached.

Nick Miller, president of Clarity Advantage, a financial services consulting group, wondered why the banks aren't offering options. “It’s interesting that [the alternatives are] coming from outside the banking industry rather than the inside. Why have the banks’ own card operations not picked that up and run with it?” he said. 

A July survey conducted by Capital Access Networks, AdvanceMe’s parent company, showed that 87% of rejected small business loan applicants surveyed weren’t offered an alternative by the banks even though 69% said they would consider one.

Joan Varrone, chief financial officer of San Francisco-based Sensage, steered her company toward a funding mechanism known as venture debt.

Venture debt allows businesses already backed by venture capital to borrow large sums of money in return for warrants, which act like stock options in that they potentially pave the way for a lender to buy stock in the company.

Companies that offer venture debt typically give larger loans than banks and thus take greater risk as they bet the borrowers will eventually be sold or go public, making the warrants worth something.

In Sensage’s case, Sand Hill Capital lent the company more money than it could have gotten from a traditional lender (Varrone said it was 10% of the company’s total financing).

Traditional lenders “won’t lend me the kind of money that Sand Hill is lending,” said Varrone.

While the interest rates on venture loans is often higher than a typical loan, Sensage's loan allowed it to avoid the dilution more venture capital would have created.

Venture debt is often given to companies without a proven track record that need more time to grow their business.

“Most banks will only lend money to companies that are cash flow positive, but almost all of our companies are not making money at the beginning,” said Chris Barber, general partner at Sand Hill.

Barber said the amount of venture debt has been growing during the past decade, especially in the life sciences and tech industries. 

Leasing is also an option, particularly if your small business only needs enough cash to make a single asset purchase such as an appliance. 

Aside from these funding options, small business owners are also encouraged to consider raising money the old fashioned way.

“If you can borrow from friends and family in a way that everyone feels good about it, then that’s always the place” to go, said Robert Hedges, Jr., managing partner at consulting company Mercatus Partners.