The advertisements are intriguing, claiming the government has money to give to entrepreneurs just like you. If you want to start a business, expand an existing business or get your operation out from under a pile of debt, the notion of receiving “free money” from the government to do so may seem like the ideal solution. After all, you pay taxes; shouldn’t you get something in return?
The problem is that the government doesn’t just hand out funds to anyone who asks, no matter what the advertisements may claim. There aren’t millions of dollars sitting in government coffers, waiting for eager entrepreneurs to come and collect them. The process of scoring government funds is quite complicated, and unless you understand the qualifications for grants and the parameters for applying, you could be setting yourself up for disappointment.
Grants Aren’t for Everyone
Perhaps the greatest misconception about government business grants is that they can be used for any type of business in any industry and for any purpose. That’s not correct; the government does not provide money to start a business, cover operating or expansion costs or pay off debts.
That being said, Uncle Sam will give money to some small businesses in very specific cases. Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) grants are available to businesses engaged in research and development projects that are believed to have great importance and potential impact in the specific industries or fields that have been identified as high-priority areas. At the state level, some states offer grants to businesses engaged in activities deemed to be beneficial to the state or regional economy in high-priority areas, such as transportation projects or alternative energy development. In short, the government will potentially help fund your company if you’re researching new ways to conserve energy, but they won’t support your sandwich shop.
Grants Have Strings Attached
As you may imagine, a government grant is not a blank check. Most grants are designated for specific purposes, and when you apply you’ll have to prove that your project falls within the parameters of the funding guidelines.
Once you secure the funding, you will have to provide evidence you used the money for the intended purpose and demonstrate results. The government will conduct regular audits to ensure you are conducting the project as you claimed you would in the original application. If you need to make any changes, you’ll have to seek approval before doing so. And you must spend every penny of the grant. Anything you don’t spend before the project deadline is returned to the U.S. Treasury.
If you don’t follow through with the grant’s requirements, you could find yourself in a heap of trouble. Failing to follow the rules could constitute theft or misuse of public funds, which might lead to punishments including fines and jail time. For that reason, it’s important to only seek government grants if you are willing and capable of following the rules to the letter.
Grant Applications are Complicated
With limited funds and stiff competition, applying for government grants is a complex process. In fact, few individuals have the tools they need to successfully manage the application process, which takes a great deal of time and in some cases, money. Depending on the funding source and program, a government grant application requires a great deal of research, documentation and planning, and missing even a single form or forgetting one piece of paperwork can disqualify you. The process is not impossible, but it’s one that few entrepreneurs have the time for.
Consider Other Funding Sources
Since government grants are most likely not going to be a viable option for securing equipment financing or expanding your small business, what’s an entrepreneur to do? There are a number of funding options available, including:
Loans and lines of credit from banks and other sources. Even if you don’t have the best possible credit, there are still lenders who will provide funding based on your business’ income. A loan will provide you with a lump sum to be paid back over time, while a line of credit gives you access to funds when you need them. You only pay interest on the money you actually use.
Factoring services. A factoring service allows you to sell your accounts receivable to another firm. While the service will withhold a small fee when the customer pays, factoring allows you to collect the money you’re owed more quickly, thus improving your liquidity.
Venture capital from interested investors. If you have a great idea or a thriving business, it’s possible you can find funding from investors who will give you money to start or grow your business in exchange for a portion of the profits. Competition is fierce, but the rewards can be considerable.
It’s important to understand it’s unlikely you will ever score “free money” to do whatever you want and that you will almost always have to repay the funds or offer proof of performance, but there is money available to you as an entrepreneur. Do your homework, and you’ll find the right source to help your business thrive.
About the Author: Business consultant and blogger Josh Collins has worked with dozens of small businesses to help them secure funding and improve their bottom line.