JOHN LIE-NIELSEN, 28, IS ON THE fast track. The San Francisco-area company he and a partner started in 1999, Allied Cash Advance, is growing right out of its britches. Happily, when it came time to buy bigger britches, Lie-Nielsen knew right where he could find the deep pockets he needed.

Lie-Nielsen has been luckier than most--he's nailed down three rounds of angel capital that helped him open the first retail locations for his short-term consumer-loan business. In three years, the company has grown to more than 35 stores while doubling revenues each year. But the business is consumer-driven, and Allied Cash Advance growth is fueled predominantly by opening new locations.

With its angel capital spent, the company needed to secure more long-term financing if it wanted to continue its rapid rollout. As the economy slowed in early 2002, however, angels and VCs were growing reluctant to write checks-and Lie-Nielsen was equally reluctant to sell stock at valuations that might not reflect the company's significant prospects for growth.

The answer? Subordinated debt. Sometimes called mezzanine financing, or just sub debt, a subordinated loan is unsecured (not backed by collateral), and therefore the claims of the lender in such a loan are second in line-subordinate-to claims from banks and other secured (asset-based) lenders.

Do the Math

"Of course, subordinated debt carries a higher interest rate than a bank loan or other asset-based loan," explains Barry Morganstern, a managing director at the Los Angeles-based corporate finance advisory firm Glick Morganstern Capital Group. "Typically, the rate is between 10 percent and 14 percent for a five-year note."

It may seem like subordinated lenders are asking a high price, but Lie-Nielsen, who previously worked as an investment banker, quickly points out: "Fourteen percent interest is much cheaper in the long run than the dilution or loss of control that would come from another round of pure equity investment. Our current shareholders could lose share value through dilution if we took in another investor in these turbulent market times."

To evaluate different finance options you have to be able to figure out the true cost of capital, often a tricky calculation. There is no rule of thumb that works in all situations. It's important to remember, however, that selling stock can work against you if the cost (in terms of share of the company) is greater than the growth you'll realize by investing that money.