While many entrepreneurs initially seek venture capital from angel investors and venture capitalists, federal grants and loans represent a significant alternative funding source. The Small Business Administration (SBA) and Small Business Investment Companies (SBICs) administer the two largest federal grant programs.
An SBA loan, whether a direct loan from the SBA or, more commonly, a bank loan guaranteed by the SBA, functions much like a traditional bank loan. However, SBA loan rates are typically lower than those of conventional business loans.
In a guaranteed SBA bank loan, the SBA typically guarantees repayment of 90 percent of the loan to the bank. This reduced risk allows banks to be more flexible in their lending criteria. However, the SBA usually requires the company founders to personally guarantee the loan, posing a risk if the business fails.
Small Business Investment Companies (SBICs) are privately-managed investment funds licensed and regulated by the SBA. Qualifying small or emerging businesses can receive equity capital or long-term loans from SBICs. These companies invest their own capital, supplemented by federal funds, in the businesses they support.
Notably, U.S. taxpayers benefit from the SBIC program, as tax revenues generated from successful SBIC investments exceed the program’s cost. The program has also facilitated the creation of hundreds of thousands of jobs.
In conclusion, SBA and SBIC financing provide viable alternatives to angel and VC funding and should be considered during the capital-raising process. As with angel and VC financing, securing SBA and SBIC funding requires a strong management team, a compelling value proposition, and a professional, persuasive business plan.