Friday, January 10, 2020

Alternative risk financing: grants and federal loans

Alternative risk financing: grants and federal loans

The two largest federal grant programs are administered by the Small Business Administration (SBA) and the Small Business Investment Companies (SBIC).

An SBA loan, regardless of whether it is a direct SBA loan or, as is more common, a bank loan guaranteed by the SBA, is essentially a bank loan. The benefit of this versus a traditional bank loan is the rate. SBA rates tend to be much lower than traditional commercial loan rates.

In most cases, in a guaranteed SBA bank loan, the SBA guarantees that 90 percent of the loan will be repaid to the bank. As such, banks have much less risk than in most other loans, and are a little more flexible with respect to who offers these loans. However, the SBA generally requires that the founders of the company personally guarantee the loans, which makes them risky in the event of the company's collapse.

Alternatively, Small Business Investment Companies (SBIC) are organized private corporations that are licensed and regulated by the SBA. Small or emerging companies that qualify to receive assistance from the SBIC program can receive social capital and / or long-term loans from these companies. Essentially, these companies provide their own capital, which is complemented by federal funds, to the companies they finance.

Interestingly, US taxpayers benefit from the SBIC program, since the tax revenue generated by SBIC's successful investments has more than covered the cost of the program. The program has also created hundreds of thousands of jobs.

In summary, the financing of SBA and SBIC are viable alternatives to the financing of angel investors and venture capitalists and should be considered in the capital raising process.