When young companies go hunting for private investors, they often find that the simplest formula is to sell equity in the business. With equity, the company doesn't have to pay anyone back; investors, meantime, gamble that their stock will one day be worth more than they paid. Every so often, however, you run into a business that pulls in money by offering investors a different sort of up side. Such is the case of Vintage Auto Works, a three-year-old manufacturer of classic cars. Over the past two years this Ligonier, Pa., company has received part of its working-capital financing from four individuals who've become partners in specific units. The technique has enabled the business to get products into the field without access to conventional financing.

When Herman Rotsch and his cofounder, Aage Din, started, they expected local banks would help them buy the components for their cars (modeled after the Jaguar XK120 from the early 1950s). Between them they had more than 40 years of experience building autos. But bankers balked at lending to their start-up.

For some of its working capital, Vintage got enthusiastic customers to prepay part of the $31,000 sticker price. But how could the company finance units for dealer display? Rotsch and Din ultimately cooked up a plan for a unique type of consignment selling that combines elements of asset-based borrowing and royalty financing. Here's how it works:

* Find investors to advance money. Working through a local investor network, Vintage asks individuals to take a financial position in specific autos. For each unit, the company needs $22,000 to cover the cost of parts, labor, and overhead. Vintage lists the investor's name on the ownership documents of those cars.

* Give them an attractive up side. It takes about six weeks to build a unit. Assuming the dealer sells it within six months, the individual gets his initial money back, plus 50% of the profit on the sale of "his" unit. On the 10 deals the company has done, Rotsch says, investors have typically made $3,000 to $4,000.

* Create an exit. What happens if a unit doesn't sell within six months? At that point, under the agreements, the investor gets to claim the auto as payment. In other words, he gets it at cost. Fortunately, Rotsch notes, it's never come to that. So far Vintage has raised about $200,000 using this brand of "angel" financing. "There's no question that this is expensive money," says Rotsch. But until the company finds an alternative, it is an effective way to show prospective customers and others what Vintage can do. -- Bruce G. Posner