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Alternative Venture Finance: Federal Grants And Loans
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.
About the Author:
Growthink 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. For
more information go to http://www.growthink.com or http://www.gtsecurities.net
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