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Finance: Federal Grants and Loans
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.
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