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Alternative Venture Finance: Federal Grants and Loans
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:
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.
Written by: Dave Lavinsky
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