Apart from equity financing or bank loans, a business owner should consider the possibility of receiving federal grants and loans. The Federal Government provides financial support to entrepreneurs who need to launch or expand a legitimate business. The grants can be from the federal government, state government or from the agencies. The most important federal grant programs are run by the Small Business Administration (SBA), and by Small Business Investment Companies (SBICs).
An SBA loan can be either a direct loan from the SBA, or a bank loan guaranteed by the SBA, which make the SBA loan essentially a bank loan. The benefit of taking up an SBA loan is the low interest rates which are typically much less than traditional business loan rates.
Usually, the SBA guarantees that 80 to 100 percent of the loan will be repaid back to the bank. As a consequence, banks take up much less risk than in most other loan cases, and are less stringent on the loan recipient. Frequently, however, the SBA requires the founders or the owners of the company to personally guarantee the loans, which allocates part of the default risk to them. An other component of the SBA program is the Surety Bond Guarantee Program (SBG) which provides financing by guaranteeing bonds for small businesses to bid on projects beyond their financial reach. Again, part of the default risk is transferred to the SBA.
On the other hand, Small Business Investment Companies (SBICs) are privately held corporations that are licensed and regulated by the SBA. Small or start-up businesses which qualify for financial support from the SBIC program can receive equity capital and/or long-term loans from these institutions. In other words, these companies provide their own capital to the funded companies, which is supplemented by federal funds.
Very similarly to other kinds of external financing, companies seeking SBA and SBIC financing need to have a strong and committed management team. Raising the needed capital also requires the business owner to submit an analytical business and strategic plan which will provide the necessary security to the loan institution about the viability and profitability of the business being financed and its capacity to finance the loan repayments.