Addressing the myth about funding a business that has many believing that there is a lot of “free” money out there for businesses
This is the fourth and last in my series of columns on funding your small business. I include this because as I interview persons who are asking for mentoring help, I experience a common myth about funding a business that has many believing that there is a lot of “free” money out there for businesses. The short message is that yes, there are some funding sources available, but they come with specific requirements, specific targeted applicants, specific available dates and timelines, the completion of specific applications and these “free sources” are not numerous.
This information is covered in depth in one of SCORE’s projects that was developed with the help of and in partnership with FedEx. This project is called “Startup Roadmap” and outlines every step in starting a business. In this column I will focus on this topic of “free money” and build on and incorporate content from the Startup Roadmap project. I encourage CEOs to ask their SCORE mentor how to access this free course.
There are a few federal grant programs for for-profit companies and some state/county economic development financial assistance programs. At the federal level, the SBA has disaster recovery grants—think Hurricanes, fires, and COVID.
Also, some agencies, like the National Institutes of Health and the Defense Department, participate in the Small Business Innovation Research program which helps companies research tech innovations for possible commercialization in areas that are of interest to these agencies.
At the state/county level, there are some financial assistance programs that foster company and job creation in their respective geographic areas. These take the forms of loans, equity investments and occasionally grants. But first I will discuss a related source of funding that some “have heard” are easy “free money”.
- Description: Angels are private individuals, often former business owners themselves, who invest their own money in small businesses. They generally invest close to home so they can work one-on-one with the company founders. Angels may invest on their own or pool their money in groups called angel networks. In return for their investment, angels get a percentage of ownership and expect to see a profit as the company grows.
- Advantage: In addition to financing, angels can often offer business advice and industry expertise, which can be valuable for a new business owner.
- Disadvantages: You’ll be giving up a percentage of your business. The angel may want more involvement than you’re comfortable with.
- When used: Angels rarely invest in startups with just an idea and a business plan. Your product or service should have reached the proof-of-concept stage; at minimum, it should be in the early stages of testing with customers and receiving positive initial feedback. If you’ve made some initial sales, even better. Angels generally expect to recoup five to 10 times their original investment within 10 years; your business should be able to generate annual revenues of about $10 million within three to 10 years.
- Examples: A team of experienced founders has invested their own money into a medical device they patented and seeks angel financing to produce and sell it.
Grants and Awards.
- Description: Grants and awards for small business startups are not as plentiful as the Internet would have you believe. However, if your startup requires relatively little capital, you may be able to finance it through local business plan awards, university grants for alumni and other grant sources. Government grants are primarily for nonprofit businesses, education, energy efficiency-related ventures, community development, and similar categories; for example, there are federal grants that fund research and development (R&D) by small businesses if it aligns with federal goals for innovation and technology transfer. State and city governments sometimes have federal funds that they can award for specific purposes. Nonprofit organizations may give grants for specific types of businesses or business owners. Nonprofits, universities, and other organizations may hold competitions that involve financial prizes.
- Advantages: Grants and awards are free money that you don’t have to pay back.
- Disadvantages: Awards are competitive. Grants for startup businesses are limited and difficult to get. Finding suitable grants and awards to try for is time-consuming. You may have to meet specific criteria, agree to use the money in a certain way, or provide evidence of results in order to get and keep a grant.
- When used: Best for a business that provides a product or service that helps a granting agency meet specific goals, or a business that fits the profile of a specific contest.
- Examples: A startup business that has developed new technology to conserve water gets a grant from a municipality that wants to reduce water use. A female-led IT startup receives a prize from a contest to encourage women in technology.