This is the fourth and final in my columns on financing your small business. I include this because I hear the common myth that there is a lot of “free” money for companies when I interview people who ask for mentor help. The short message is that, yes, there are some sources of funding available, but they come with specific requirements, specific targeted applicants, specific available dates and timelines, and the completion of specific applications. And these “free sources” are not many.
This information is processed in depth in one of SCORE’s projects developed with the help of and in collaboration with FedEx. This project is called “Startup Roadmap” and describes each step in starting a business. In this column, I will focus on the topic of “free money” and build on and incorporate content from the Startup Roadmap project. I encourage the CEO to ask his SCORE mentor how to access this free course.
There are some federal grant programs for for-profit companies and some state / county financial development assistance programs. At the federal level, the SBA has disaster recovery grants – think hurricanes, fires and COVID-19.
Some agencies, such as the National Institutes of Health and the Defense Department, also participate in the Small Business Innovation Research program, which helps companies explore technological innovations for possible commercialization in areas of interest to those agencies.
At the state level, there are some financial aid programs that promote business and job creation in their respective geographical areas. These take the form of loans, equity investments and sometimes grants.
But first I will discuss a related source of funding that some “have heard” are simple “free money”.
- Description: Angels are private individuals, often former business owners themselves, who invest their own money in small businesses. They usually invest close to home so they can work one-on-one with the company’s founders.
Angels can invest on their own or merge their money into groups called angel networks. In return for their investment, angels receive a share of the 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 to a new business owner.
- Cons: You will give up a percentage of your business. The angel may want more commitment than you are comfortable with.
- When used: Angels rarely invest in start-ups with just one idea and one business plan. Your product or service should have reached the proof-of-concept stage; at least it should be at an early stage of testing with customers and getting positive initial feedback. If you have made some first sales, even better. Angels usually expect to get back five to ten times their original investment within ten years; Your business should be able to generate annual revenue of about $ 10 million within three to ten years.
- Example: A team of experienced founders have invested their own money in medical equipment that they patented and are seeking angel funding to produce and sell it.
Grants and awards
- Description: Grants and awards for start-ups are not as plentiful as the Internet would make you believe. But if your startup requires relatively little capital, you may be able to fund it through local business plan awards, university grants for alumni, and other sources of funding. Government grants are mainly for non-profit companies, education, energy efficiency-related initiatives, societal development and similar categories. For example, there are federal grants that fund research and development (R&D) of small businesses if they meet federal goals for innovation and technology transfer. State and city governments sometimes have federal funds that they can allocate for specific purposes. Non-profit organizations can provide grants for specific types of companies or entrepreneurs. Non-profit organizations, universities and other organizations can hold competitions that involve financial prizes.
- Benefits: Grants and awards are free money that you do not have to pay back.
- Cons: Awards are competitive. Grants to start-ups are limited and difficult to obtain. Finding suitable grants and awards to try is time consuming. You may need to meet specific criteria, agree to use the money in a certain way, or provide proof of results to receive and retain a grant.
- When used: Best for a company that provides a product or service that helps a donor achieve specific goals, or a company that fits the profile of a specific competition.
- Example: A start-up company that has developed new technology to save water receives a grant from a municipality that wants to reduce water use. A female-led IT start receives a prize from a competition to encourage women in technology.
- Dean Swanson is a volunteer-certified SCORE mentor and former SCORE chapter chair, district director and regional vice president of the North West Region.