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It was an idea Michael Godel, a Toronto fine-food caterer, had been toying with for years. He had been noticing the growing popularity of vintage wines, so in 2004 he decided to create an online adjunct to his business where customers could read expert recommendations and order new releases.

To pull it off, he'd need an attractive website. However, he didn't want to invest capital he didn't have. Nor did he want to draw from his company's $25,000 line of credit. Instead, Godel asked an acquaintance, an architect who was on sabbatical, to help him create the site. The architect hired a pair of software designers, and together they worked on the e-commerce features for eight months before going live last year. Godel arranged with the architect to pay for the work, worth $8,000, as soon as his new business, Vintage Direct, started making money.

Godel is no stranger to the art of innovative small-business financing. He launched his first company, All Our Favourite Foods, out of an east-end industrial building in 1993, by cutting a deal with the landlord. Godel promised to secure the building approvals and renovate the place if the landlord knocked $10,000 off the rent. He then went to his bank and obtained a $10,000 small-business loan to buy kitchen equipment. A decade later, with Vintage Direct, he took an even more economical tack. "I was able to finance it slowly myself on a pay-as-you-go basis," he says. "There was never a point where I suddenly had to pay out large amounts of cash."

His foray into wine has proven to be a big hit with customers. What's more, his story offers some insights into one of the most important aspects of launching a small business. To survive those crucial first months, entrepreneurs need to find the right kind of financing, a search that often calls for as much ingenuity as the business venture itself. According to the Royal Bank of Canada, financial institutions approve about 80% of small-business loan applications, but the hunt for investment capital doesn't begin or end at the branch on the corner. Nor is it a random search based on hunches. It requires research and preparation.

You need a plan

While entrepreneurs pride themselves on their spontaneity and willingness to take risks, Kevin Dane, a VP for the Business Development Bank of Canada, says it's still critical to meticulously plot out your venture. That means a business plan. And if it's going to sway anyone, your plan will need to outline the opportunity, the competitive environment, the marketing strategy and the sources of financing. What's more, it will need to do it in a concise and realistic manner. In fact, you'd be well advised to hire a corporate writer to polish it up before presenting it to anyone.

If you go it alone, however, there is ample information online and in bookstores on how to prepare a compelling plan. What almost everyone will tell you is: Be ultraconservative about sales projections and very clear-eyed about the competition. "If you think at six months you'll be selling a million dollars of something everyone else is selling, that's unrealistic," says Dane. "The pie is only so big."

Hint Cut to the chase. Lead off with a tightly worded executive summary that lays out the proposal, explains why the venture requires financing and specifies how much you need.

Cash flow is king

Regardless of whom you approach, rest assured that the first thing any lender will look at is the dollar signs. When it comes to financing, it's all about the money. The best way to determine how much you need is to develop a cash-flow forecast, says Kris Depencier, head of small business for RBC. Begin by tallying up the monthly costs of your start-up expenses (items like equipment and inventory) as well as your ongoing operating outlay (rent, utilities, technical support and office supplies) and your personal cash needs (salary, personal mortgage, etc.). After you subtract your monthly sales projections, you'll have an estimate of your monthly cash requirements (a.k.a. burn rate). That number—which, alas, will be coloured red—provides a rough calculation of how much money you'll need to bring into the business to stay afloat. The benchmark for most business start-ups is profitability in Year 3. That doesn't mean you won't be raking it in earlier; just don't count on it.

Hint Besides securing a line of credit, it's a good idea to set aside a rainy-day reserve fund equivalent to one-fifth of your total upfront investment, to cover operating expenses through slump periods. Make sure to keep the money separate from the business.

Very personal finance

For many entrepreneurs, the first stop for cash will be family and friends. Toronto-based business consultant Larry Ginsberg cites the case of a tech start-up where the principals all had paying jobs so they could cover the rent while they wrote code. To take it to the next level, though, they approached a number of personal acquaintances and put together enough cash to see them through a six-month development phase. But such arrangements should be at least as formal as bank loans—a written agreement complete with interest fees and repayment terms—and treated as such.

"If you go under, the loan from family and friends won't disappear," Ginsberg says. "There have been many friendships that have broken up over loans." One solution: Ask your backer if he'd be willing to provide the cash as a gift rather than a loan, an arrangement that carries less risk of disappointment or conflict.

Divine intervention (and other options)

If hitting up your friends isn't an option, tap your network of business professionals—bankers, accountants, lawyers and insurance/investment advisers—for leads to other backers. Just don't bet on the banks to help you, not unless you have loads of personal assets. Most branch loan officers today are of only limited assistance because the lending process is increasingly automated—financial institutions run loan applications through elaborate computer systems programmed to calculate risk. Your network of contacts may be able to link you to angel investors who earn a living by betting on upstart firms.

Hint Don't forget credit unions, which have positioned themselves as being more user-friendly than their largish cousins in the banking sector. "We try to take a more collaborative approach and go beyond using formulas," says Kevin Zakus, Vancity Credit Union's VP of business banking.

Get ready to cough up

If you do pursue the bank or credit union route, know that they'll want you to demonstrate your credentials and commitment before approving anything. Expect to have your entire credit history scrutinized in great detail. Indeed, it's a good idea to request your own credit history from Equifax or TransUnion so you make sure the information is as clean and accurate as possible. The soulless computer that will assess your data won't care if there's a perfectly good explanation for why that cheque bounced back in 1989.

Remember, too, that lenders will want to see evidence of personal financial commitment—the so-called skin-in-the-game factor. The rule of thumb is a three-to-one debt-to-equity ratio. In other words, if you're trying to secure $15,000 worth of financing, you'll probably need to have at least $5,000 of your own money on the line.

Hint If you feel there are errors in your credit history, you can try to clear the record by filing an appeal. That will enable you to examine the discrepancies between your own documentation and what's included in the credit history.

Welcome to the credit buffet

If your application is approved, you'll likely be offered a smorgasbord of commercial lending instruments—everything from corporate credit cards to lines of credit, overdraft protection, term loans, equipment leases and various mortgages. RBC's Depencier says a line of credit is good for ongoing operating expenses, such as payroll, while a business credit card is the best mechanism for routine outlays such as office supplies and travel, because the monthly statements provide a quick-and-dirty accounting of business expenses. The line of credit should be able to cover what you estimate will be your largest shortfall during a typical month—meaning the gap between expenses and receivables.

For larger capital expenditures—cars, buildings, computer equipment, machinery—term loans and leases are preferable because they won't gum up your short-term cash flow. With a loan, the business owns the asset, which is staked as a security. The term of the loan should be roughly equal to the usable life of the asset. Leases come in two flavours—operating and capital. With a capital lease, you may have to buy the item at the end of the lease. There's no such obligation with an operating lease.

Hint Through its regional development programs, the federal government partially backstops certain small-business loans, so it's worth asking if your lending institution participates. Vancity, for example, offers a "Self-Reliance Loan" guaranteed by Ottawa. If the owner puts up 10% of the necessary capital, Vancity covers the rest, up to $35,000.

Come back when you're bigger

If you've got a few years of business under your belt, the financing picture tends to look a lot less cloudy. Banks will be more willing to approve larger loans and better interest terms on lines of credit. In some cases, growth-minded entrepreneurs can begin to think about subordinated debt (a type of bond that can be converted into shares) and venture capital, both of which are potential sources of financing provided by firms that specialize in speculative, growth-minded businesses. The quid pro quo is that you'll have to relinquish partial or complete control over your company's shares, because such investors will expect an exit strategy that involves some kind of public offering. Business consultant Larry Ginsberg says the majority of venture capital firms in Canada won't consider requests for less than $1 million, largely because smaller amounts don't justify the substantial legal and accounting fees involved. Hint While the websites of most VC firms say they welcome unsolicited business plans, "they much prefer to have someone refer you," says Ginsberg. Most investors tend to be very focused on specific niches, such as R&D firms, and highly resistant to calls from out of the blue.