Free Money Myths From The Government
Michael Kraft, Bob Judevine and Chuck Eason/For the Times-Standard
Article Launched: 06/08/2008 01:31:05 AM PDT

”There are no grants for starting a business.” This is almost a mantra for those of us who work with people trying to get a business off the ground. Locally, the statement is about 99.7 percent accurate. Of the 700 clients the North Coast Small Business Development Center will see this year, for example, perhaps one or two would qualify for a government grant to get underway. With that one significant exception, which we'll describe below, the government doesn't provide startup grants.

Typically, when you hear “free money from the government”, it's from some chucklehead howling at you from late-night TV. The bit is appealing: You have always suspected there were stashes of government money lying around, if you only knew the secrets to getting it.

If it sounds too good to be true, you are correct. The Federal Trade Commission has issued a consumer alert about this type of hustle stating that “money for nothing” grant offers often are a scam.

But don't take our word on this. Do a Google search using the keywords “grants,” “complaints” and “scams.” You'll get close to 300,000 hits listing legal actions, fraud filings and the like.

We get calls every week from folks looking for the free money to start their business. Let's look at some of the most common myths we hear.

Myth no. 1: Grants are cash money to start businesses. The government will give it to you -- no
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strings attached -- if you know the secrets. The government is willing to pay you to create jobs.

Truth: The U.S. government does not provide grants to start or run a business. Grants are generally tied to a social cause in some way or another. They are not made to enrich an individual or business. “Grant” is a general term with many definitions. This is why many scam grant lists have small business development centers listed as a source of money. We provide free services, but we have no piles of money to give away.

Myth No. 2: Entrepreneurs who are successful must have gotten some kind of break.

Truth: Lack of cash is not usually what prevents most folks from starting a business. A study by the Kauffman Center for Entrepreneurial Leadership and Babson College found that entrepreneurial activity in the United States ranks among the highest in the world, with one in 12 adults engaged in a new company start-up, compared with one in 60 in Finland and Japan. There are 600,000 to 800,000 new companies started every year in the United States.

”It's not the Microsofts that are accounting for all of this growth, but all the wannabes,” said Michael Camp, head of research at the Kauffman Center in Kansas City, Mo. The study also found that the average start-up investment for a new company was just over $5,000. Generally folks will create a business plan that details start-up costs and operating capital needed. More businesses fail for lack of planning than for lack of money.

Myth No. 3: The government only helps big corporations. That is why there is no cash for me.

Truth: The U.S. Small Business Administration guaranteed loan programs for businesses are the federal government's main activity to leverage business growth. These programs help lessen the greater risk business loans present for lenders. As a result, more entrepreneurs get funding for their businesses. These programs facilitated more than $16 billion in business financing in 2004. This type of loan still requires the borrower have credit, collateral and a plan for their business. You can find out more about an administration guaranteed loan for your business startup or expansion by asking your banker.

We started by saying that the “no grants for business startups” mantra was 99.7 percent true. That means that .3 percent of businesses could qualify for a grant to get started. Generally, for this to be true, you have to be a lab rat -- or partnered up with one -- who has research that could be commercialized in an area of interest to the federal government. Brake shops and herbalists need not apply. Each year more than $2 billion is awarded to small businesses by the eleven federal agencies participating in the Small Business Innovation and Research and Small Business Technology Transfer programs.

Under the SBIR/STTR Program, small businesses can receive up to $100,000 in Phase I funding to demonstrate the feasibility of a new technology and up to $750,000 in Phase II funding to develop field prototypes to validate the new technology. Phase III is then commercialization of the new innovation, and no federal funding is provided. California businesses receive more SBIR/STTR awards than any other state. Last year over 500 Phase I awards were made to California businesses.

The SBIR/STTR program is very competitive. On average, one out of 12 applicants receives funding under Phase I of the SBIR/STTR program. If a firm is successful in completing Phase I, their odds of obtaining Phase II funding are then approximately one out of two to one out of three. Companies are rarely successful in their first attempt at SBIR funding due to their lack of knowledge on how to put together a successful proposal.

With the exception of the highest-potential technology businesses, the bottom line on the free money from the government question is the answer our parents gave us years ago. When one of us wanted to buy X-ray glasses, mom said “if it sounds too good to be true, it probably is.”

Michael Kraft, Bob Judevine and Chuck Eason all serve in some way in the Northern California SBDC network. You can reach Michael Kraft, executive director of the North Coast SBDC, by e-mail at kraft@northcoastsbdc.org

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