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You're desperate. Your fledgling business needs money. You've exhausted family, friends and fools for funds. The banks say no because you lack security. You fall upon your knees.

Then the clouds of despair part as the light of business angels and other early growth funders shines down upon you. You believe in them and, fortunately, they believe in you too.

As the Midlands frets about where the next generation of businesses will come from, there has rarely been such demand for business angels - private individuals who invest their own cash into fledgling firms - and early growth funds, private or public funds that invest in riskier, yet promising businesses.

Roger Wood, investment director at Birmingham-based Midven, says: "The sort of companies we back are not able to raise loans because banks are not prepared to fund them. The stereotypical company has strong IP, but a management team that isn't a complete one. Generally you find a lot of guys out there trying to develop their own business, but not always the full team."

Norman Price, chairman of the Enterprise Board and Regional Finance Forum, adds: "The thing of business funding is that it is based around banking systems that need assets as security. And if you don't have assets it's hard to get loans. So that means money has to be raised with equity. Of course a proper flotation at this stage is out of the question, so that means going to business angels and venture capital trusts."

Although there are no hard and fast rules it is generally agreed that both forms of funding operate in the region of £350,000 to £35m, with angels tending to cluster at the former end and venture capital trusts (VCTs) at the upper, although there are huge overlaps between the two. Early growth funding is more than just making companies bigger however. The professional rigours imposed by either business angels or VCTs makes growing businesses investment-ready for the next stage of development, whether that is a flotation, acquisition or private equity funding.

As Wood observes: "Venture capitalists (VCs) are like sheep: there's no guarantee that when we put money in another VC that someone else will, but they're more likely to. They think there is obviously something good about it. The perfect thing for us is to invest, build it up, go down to London 18 months later and get someone else to invest as a secondary buyout."

Steve McEwen, of business angel network Beer & Partners, says: "The equity gap changed when 3i, which was first set up to do this, moved out of the region and out of the market to bigger investments. Our average per deal is £3364,000.

"The first funders are usually friends, fools and family who can get you up to £350k, then Mustard programmes, which help with product developments. Then it's really business angels and VCTs."

VCTs have expanded hugely over the past few years. Advantage West Midlands (AWM), for example, has five equity-based finance schemes in the region. They include the Mercia Seed Technology Fund, launched in March 2007 to provide up to £3750,000 for technology. Mercia has been going great guns, making announcements of fresh investments on an almost weekly basis.

The East Midlands, meanwhile, has schemes like the Lachesis Fund, a £34m VCT designed to help spin outs from the region's universities, the £330m East Midlands Regional Venture Capital Fund administered by Catapult - which closes April 2008 - and the East Midlands Early Growth Fund, a £35m mirror image of the West's Mercia launched in late 2006.

Although VCT funding is soaring - those backed by AWM and East Midlands Development Agency (Emda) alone now touch £3100m in available cash - angel funding is still below where it should be. Although angel investment between 2003-6 in the West Midlands almost doubled to £31.7m, a report commissioned by AWM found "there remain areas of market failure, evidenced in particular by too many angel deals not being fully funded at each stage, a significant number of proposed deals failing to receive any angel funding, a continuing move towards larger deals and too few angel networks operating in the region."

Compared with the £31bn or so invested by angels in the US - where angel funding is the norm - the Midlands' ability to attract such blessed cash looks decidedly paltry.

But hopes on the state of the angel market are rising. It was that market failure that led to AWM launching Investbx, its innovative virtual trading platform that hopes to put business angels in contact with companies seeking up to £32m investment. It is understood that it hopes to make its first announcements on investment by late 2007.

And other angel networks appear to be growing in attraction to potential investors.

Neil Mackay, managing director of the network Advantage Business Angels, says his organisation now has 12,000 potential investors on its books.

He adds: "It's growing quickly, and the profile is changing rapidly too. The typical business angel is still, admittedly, 55 upwards, white, male. But increasingly we're seeing a lot of younger people, in their 30s or even 20s, who have already made their money, and there are a lot of female and ethnic minority business angels coming on board now. The profile is broadening."

Toby Read, of East Midlands angel network Ginem, whose members have struck deals worth £37m over the past three years, adds: "It's not so much the lack of angel funds or investors that's the issue, rather a lack of awareness among companies that this type of investment is available, or how to access it.

"And there is often a lack of education on how angel funding works, typically among technical business where you often get a couple of boffins with little experience and unrealistic expectations. It's as much about making businesses investment ready as making them aware that the money is available in the first place.

"However there are signs that the education process is starting to work. In fact Emda has just decided to fund Ginem for three years, partly so we can do this."

Wood agrees. "I'm not convinced there is an equity gap. Good businesses find money. There are a huge number of businesses trying to get money that can't and that's usually because they're not good enough. There is a lot of public money going into investment ready programmes," he says.

McEwen adds: "It's hugely important. What we are doing as a business angel network is selling a business proposition. All investors have three basic questions: How Much? Why? And when do I get my money back? Unless you can answer those eloquently and fully you will not get them. We can't spend time re-engineering businesses because they aren't yet investment ready."

It would be a mistake to think that business angels and early growth funds are competitors. Indeed many publicly-backed VCTs need match funding from business angels to allow them to invest. Many also see angels often acting as the step between early grant funding and VCT investment.

Price, himself a business angel, says: "Early growth funds tend to work with, rather than act in opposition, to angels. So you get a small VC fund and professional group putting in due diligence to put some semi-pro money in as well. Everyone tends to work well together."

It is also no secret that, even with a great idea and a rock solid business plan, investing in fledgling businesses - particularly those with a technology bent - is a high-risk business. Even its greatest proponents admit that, as a general rule of thumb, out of every six or so businesses expect only one of them to fly: two will probably burn or crash, two will return the investment and one will do so-so.

So what attracts angels to invest? Well firstly the tax breaks are good: enterprise investment schemes get 20 per cent tax relief up front and zero capital gains tax and, if the investment is held for longer than two years, it is free of inheritance tax.

And sometimes, just sometimes, the bets come off spectacularly well. McEwen says: "We have a guy who netted £315m. He was an accountant who had £33m to invest and spread it over six companies.

"This chap was really anguished about what to do with the rest of his life. He was driven more by wish to be useful than making a mint. To be a business angel you need to do more than give spare cash, you have to give time. There is something in the human chemistry that makes us want to do something worthwhile."

McEwen points to one of the real underlying motives for business angels: helping run a company, sitting on the board, being there as the battles are fought and won, is exciting. Most entrepreneurs are driven and for many the idea of spending their golden years in an endless round of golf seems like hell before death. Being an angel is sexy.

Read says: "The programme Dragon's Den has been a mixed blessing, because it's raised the idea of business angels in the public imagination, but created the impression that they rip you apart.

"We prefer angels rather than dragons because they are a force for good. They don't breathe fire, just bring a little light."