Grants to Start a Small Business: Finding Start-Up Capital

Take a poll among any number of individuals hoping to start a business and ask them what is keeping them from actually doing it. At least five times out of ten, the answer would be insufficient capital to get things off the ground. The truth is that finding start-up money is one of the most challenging aspects of putting up a business, despite what the so-called business-financing “experts” have to say. These self-proclaimed insiders often hold seminars from one city to another, raring to share the secret to obtaining government grants for small business capital. They would have you think that the process is so easy that they can actually file everything on your behalf to spare you from dealing with the necessary bureaucracy for just a one-time upfront assistance fee (of course!).

We sincerely hope that you’re not pinning your entrepreneurial dreams based on these too-good-to-be-true claims because as far as government business grants are concerned, the odds of winning one is just too poor. First of all, there are just too few grants to go around; unless your business proposal is so unique and game-changing, you probably won’t even get through the pre-screening process for application. Sadly, the government just doesn’t have a lot of money to give away, even if it’s for worthy endeavors. The grant money that does happen to be available are typically allocated for highly specialized niches such as socially-relevant research and issues. Starting a new business just doesn’t fall into either category.

If you have ever inquired about this with the United States’ Small Business Administration (SBA), then you already know all this. In fact, the SBA gets several queries a day about entrepreneurial financial assistance. Their official response is that the SBA does not provide any grants to start or even expand small businesses.

It can be a bit disheartening to be told this, but we do have some good news: while the SBA is a dud as far as small business grants goes, there are viable alternatives. One of these is the Small Business Investment Company (SBIC) program which has been providing venture financing to more than 90,000 small businesses since it was established in 1958. Unlike run-of-the-mill venture capitalists which will demand quick returns on their investment, SBICs maintain a unique and successful partnership with the U.S. government; their purpose is to provide venture capital and start up financing to small business all over the country. This kind of funding allows small entrepreneurs a more beneficent opportunity to grow their business.

SBICs are privately owned and managed investment firms that are licensed and regulated by the SBA. There are around 450 SBICs established all over the United States as of the present. In over 50 years of existence, the SBIC program has released almost $30 billion in the form of loans and equity investments to qualified petitions. In fact, many of the established brand names today actually started out using seed money from SBIC, such as America Online, Apple Computer, Callaway Golf, Federal Express, Gymboree, Outback Steakhouse, Staples, Sports Authority, etc.

Despite the massive resources as its disposal, knowledge of the SBIC program has remained to be kept away from the general public, simply because the industry of venture financing happens to be highly competitive. As expected, many of those who expect to benefit from the SBIC program have been motivated to keep it as a secret, to prevent potential rivals from gaining the same advantage. All in all though, it has worked out for the greater good as a low-profile have helped keep it from high-risk prospects.

NetSpend beginnings

One of the more impressive up-and-coming ventures that obtained SBIC funding is NetSpend Holdings, a company that has now become a leader in the prepaid debit industry.  NetSpend cards are currently being sold in more than 62,000 locations all over the country, certainly a far cry from its humble beginnings in a one-bedroom Austin apartment back in 1999. This success story of brothers who transplanted their families from Mexico to Texas has a very sweet ending: last month, the company was bought out by payment processor TSYS for $1.4 billion in hard cash. The money move? Back in 2000, brothers Roy and Bertrand Sosa realized that the company was on the verge of exploding and they got several SBIC to accelerate their growth. By 2012, NetSpend had expanded into a 500-employee company. That same year, they posted a revenue of $351.3 million.

Moving unto bigger and better things

One of the reasons why SBIC have achieved a great track record in powering small ventures into the big-time is that policies and investment decisions are made by qualified private fund managers. It goes without saying that SBIC are entirely free to invest in whatever area of interest they deem feasible. Some SBICs prefer to invest generally, while others prefer to pick a particular industry where their managers have expertise. There are even Specialized Small Business Investment Companies (SSBICs) who chose to deal exclusively with small business applications from entrepreneurs who come from socially and economically disadvantaged backgrounds. Do note, however, that if there are any concerns that your primary business activity is contrary to public interest, you cannot qualify for venture funding through the SBIC program.

Although the government regulates the SBICs, it does not make direct investments nor meddle in the process of selecting eligible ventures. However, the U.S. government is actually the largest single investor when it comes to private equity funds. That’s because for every dollar that the SBIC invests in a business, the SBA matches it with two. The form of SBA funding available to a particular SBIC varies, and it will affect the type of investments they can engage in.

How to get in touch with SBICs

The National Association of Small Business Investment Companies (NASBIC) is a good place to begin your search, as is the National Association of Investment Companies (NAIC). The NAIC is particularly oriented to provide financing for minority-owned businesses.

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