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Grants for Starting a Business-- What's Real and What's Not

The ads and junk emails are prolific -- Free grant money to start your business! But is there really free money out there for your startup? The short answer is, of course, it depends. While there are some small business startup grants programs, they are not as prolific as the scammers would have you believe. And, any "free" money that is available is not exactly free -- there are always conditions and requirements attached. Before you stake your future on securing a major grant to start your business, it is important to understand what is and what is not actually available and what it means to budding entrepreneurs.

First, do not waste a dime on "grant finders." There are no secrets in grant funding. The organizations that do provide grants market their availability and want legitimate applicants to find them. The applications are readily available and tell you exactly what you need to have and do to qualify. The majority of grant seeking businesses are scams. They will tell you that they have an "in" with the grant makers...they don't. Generally, the actual grant makers get that money from a grant of their own, often from the federal government. They also have significant strings attached in that they can only use that funding for the specific purpose approved by the original grantor.

Most grants originate with the federal government or through family or corporate foundations. These initial grants typically are reserved for nonprofits. That is, existing nonprofits apply for the grant funding and use the money to further their exempt purpose. Some of these nonprofits are economic development corporations or other small business nonprofits that serve entrepreneurs in their local communities. The SBA, obviously, gets the majority of small business funding from the federal government, but there are millions distributed to local nonprofits as well.

The nonprofits receive the grants for specific purposes -- to provide training, encourage small business growth, and, yes, some is also earmarked for startups. Generally, however, the nonprofits prefer to allocate the money in loan form, where the entrepreneur is on the hook for repaying, albeit at a lower rate than any bank will offer. Some provide loans along with a "forgiveness" program, such that if your business meets certain requirements some or all of the loan principle is forgiven and you don't have to repay it. The terms often involve employing a minimum number of employees within a set amount of time or opening the business in an economically distressed area.

The small business grants that are available rarely go for startups. More often they target second round financing. This makes sense because the ventures have already shown their viability -- they made it far enough to need an influx of cash to grow. They are far less risky than startups because they have a history of success and actual financial reports to review. Remember, the nonprofits have to establish that they are meeting the purpose of their organization in order to qualify for the grant money the next time. And, no matter how great your business idea is, the nonprofits are bound by the conditions set on the money they have, whether directed by the original grantor or the board of directors, and there is usually very little room for bending the rules.

If you do find a grant opportunity that fits your startup idea, the odds are that you can handle the application yourself. In fact, while grant writers can be a worthy investment in some cases, it is usually better if you work through the process yourself so you know exactly what it is you are agreeing to. You business idea will need to be thoroughly researched and planned before you are eligible for any type of small business grant or loan. The back-of-the-napkin number will not cut it. And, you will likely need to show that you have committed your own assets to the startup...nobody is going to hand you money if you won't risk your own.

If you are seeking a grant to launch your business idea, start with your local economic development office. Check with the SBA, ask the librarian. Nonprofits looking to expand business in your area want to be found and they want people to start new ventures, especially during an economic recovery. Even if they don't provide cash grants, they may have other useful services for your startup, including mentorship to help you find other ways to secure funding for your venture.

About the Author

LaunchX.com is dedicated to training entrepreneurs to turn their good ideas into great companies. The LaunchX System provides step-by-step education in the mindset and skill set entrepreneurs need to succeed. Our program includes intensive seminar training, key business software, and specialized workbooks that teach you the fundamental skills you need to achieve your financial and worklife goals through entrepreneurship. Register today for our introductory course and see what LaunchX can do for you!