Photo (cc) by Ray Sawhill
As a business owner myself, I’m all about helping others start their own business, become their own boss and live their dreams.
Here’s this week’s reader question:
Hi, I am just starting a new business. I have done all of the filing and am at the point that I need startup capital and business lines of credit.
For the startup capital, will you help me in getting government grants? Please tell me where I should look and apply that will not cost me to submit an application. And also, where do I find legit private lenders?
Thank you. — Shaela
First, Shaela, congratulations on starting your own business. But let’s get you started on the right foot by avoiding a big mistake right out of the gate.
Government grants: Just say no
Like many rumors and rip-offs, the one about government grants contains a grain of truth.
The government does hand out grant money — but never to the typical small business.
The government might give a grant to a university, for example, to explore the efficacy of an experimental drug. There are also grants through the Small Business Administration, or SBA. They include the Small Business Innovation Research and the Small Business Technology Transfer programs. But as the names imply, these grants are about research and high-tech innovation, not working capital for business startups.
If you see a site or ad promising grants to just about any small business, run the other way. Uncle Sam says in black and white he doesn’t do that. From the SBA website:
The federal government does NOT provide grants for starting and expanding a business.
Government grants are funded by your tax dollars and therefore require very stringent compliance and reporting measures to ensure the money is well spent. As you can imagine, grants are not given away indiscriminately.
Grants from the federal government are only available to noncommercial organizations, such as nonprofits and educational institutions in areas such as medicine, education, scientific research and technology development. The federal government also provides grants to state and local governments to assist them with economic development.
In short, there’s virtually no such thing as free money in the form of federal government grants to start or fund a for-profit business. Anyone promising one is most likely trying to succeed in their own illegal small business. Don’t contribute to their bottom line.
New ways to borrow
When you read about angel investors or venture capital groups ponying up millions to help small startups, or watch shows like “Shark Tank,” it’s easy to conclude there’s tons of money out there dying to find you.
Unfortunately, nothing could be further from the truth.
Unless you have major-league connections, a monster resume, the best idea since sliced bread and lots of your own money at risk, most traditional lenders, like banks, won’t touch you.
Until just a few years ago, that was the end of the story. Today, however, it’s just the beginning, because these days there are lots of faster, easier and better alternatives to banks.
6 lending sites to consider
These web-based lenders provide cash for everything from a dream vacation to debt consolidation to small-business funding. You’ll typically find the application and approval process much easier and faster than a bank: Some of these sites say they can approve a loan in as little as two minutes. Interest rates are current as of this writing, but can fluctuate any time. In general, the more creditworthy you are, the lower the rate.
- Lending Club: One of the first lending sites, Lending Club offers loans up to $40,000. Current interest rates range from 5.99 to nearly 36 percent.
- Kabbage: Kabbage is specifically for small businesses and offers lines of credit of up to $100,000, but you’ll need to show you’ve been in business as least one year and have more than $50,000 a year in revenue. Repayments are made on a six-month or one-year term. The lender doesn’t charge interest. Instead it charges fees ranging from 1 to 12 percent.
- Karrot: Owned by the same company as Kabbage, this website offers personal and business loans of up to $35,000 with repayment terms of either 36 or 60 months. Rates range from 6.44 to nearly 30 percent.
- Upstart: This lender targets millennials who may not have the creditworthiness of more established borrowers. The application asks for information such as where you went to school, when you graduated and what you studied. Loans from $3,000 to $35,000 are offered, with interest rates starting at 4.7 percent.
Got more money questions? Browse lots more Ask Stacy answers here.