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Alternative Venture Finance: Federal Grants and
Loans |
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by: Dave
Lavinsky |
While most companies
seeking venture capital initially think about angel investors and
venture capitalists, a large alternative source of financing is
federal grants and loans. The two largest federal grant programs are
run by the Small Business Administration (SBA), and by Small
Business Investment Companies (SBICs).
An SBA loan,
regardless of whether it is a direct loan from the SBA, or, as is
more common, a bank loan guaranteed by the SBA, is essentially a
bank loan. The benefit of it versus a traditional bank loan is the
rate. SBA rates are typically much less than traditional business
loan rates.
In most cases, in a guaranteed SBA bank loan,
the SBA guarantees 90 percent of the loan will be repaid to the
bank. As such, banks are at much less risk than in most other loans,
and are a bit more flexible with regards to who they offer these
loans. However, the SBA usually requires the founders of the company
to personally guarantee the loans, which makes them risky should the
venture collapse.
Alternatively, Small Business Investment
Companies (SBICs) are privately organized corporations that are
licensed and regulated by the SBA. Small or emerging businesses
which qualify for assistance from the SBIC program can receive
equity capital and/or long-term loans from these companies.
Essentially, these companies provide their own capital, which is
supplemented by federal funds, to the companies they fund.
Interestingly, U.S. taxpayers benefits from the SBIC program
as tax revenues generated from successful SBIC investments have more
than covered the cost of the program. Likewise the program has
created hundreds of thousands of jobs.
In summary, SBA and
SBIC financing are viable alternatives to financing from angel
investors and venture capitalists and should be considered in the
capital raising process. Similarly to angel and VC financing,
companies seeking SBA and SBIC financing need a strong management
team and value proposition, and a highly professional and compelling
business plan in order to raise the capital they need.
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About the author:
GT Business Plans has developed
over 200 business plans for clients that have collectively raised
over $750 million in financing, launched numerous new product and
service lines and gained competitive advantage and market share. GT
Business Plans is the sister site of GT Venture Capital
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