“Free Money to Pay Your Bills!” Or Maybe Not (Part 2)

In Free Money to Pay Your Bills! Or Maybe Not Part 1 we discovered how Matthew Lesko (and others) use word play and semantics to get you to buy their books believing you will obtain riches on someone else’s dime.  In Part II we will discuss what you really are buying when you purchase one of these grant guides. 

A distinction needs to be made between grants, loans you don’t have to pay back, financial assistance payments, and government contracts all referred to by various grant guides as ”free money”.  These words get thrown around a lot in Lesko (and others) commercials so much and sometimes so close together they seem interchangeable when in fact they are not.

Grants- There truly are grants available for small businesses.  And, I believe in fact the people represented on Lesko’s commercials genuinely received grants for the business they started.  But, the fact is these programs are far from prevalent in most communities.  And when they are available they are: a) limited in geographic scope and industry classification b) limited in terms of who can qualify for them and c) limited in how the money can be used.  Most of the grant sources are localized so if there is a grant for a person with a disability to start a widgit retailer in Podunk, Missouri they are not going to give you the money to start that shop anywhere else. 

Here in North Dakota we have grants available for home based Child Care for safety equipment, Agricultural Product Marketing & Prototypes and New Technologies born out of rural companies.  Also, in some communities local Job Development Authorities and Economic Development agencies offer grants to specific startup businesses. 

I don’t mean to say that grants are not available.  In fact, I helped one of my clients get $65,000 in grants to open a small manufacturing business in small town, ND…none of which he had to pay back.  But this is the exception not the rule.  Out of over 1000 clients I have counseled since 2003 only about 5 have received grants and of them only 1 was aimed at starting their business rather than expanding it.

Loans You Don’t Have to Pay Back - The best I can tell this category must be referring to preferred stock investments made by state and local economic development organizations.  Preferred Stock like a hybrid between debt and equity (ownership).  It is a secondary class of stock usually with no voting rights and only entitled to a stated dividend rate (like an interest rate) that has to be paid before common shareholders (the owners).  Usually, the company pays the dividend for several years until they cash flow and then starts paying back the investment (principle) when the company is financially sound.  On the other had if the investment is made and the company goes belly up the next year there is usually no recourse (repayment) because it is equity…not debt. 

Preferred stock investments are great for cash strapped early stage startups who need time to get to cash flow.  Rather than huge payments on a big SBA loan they can make interest only payments annually and principle when it is available (if ever).  This is an excellent tool used by many economic development groups.  Often, when you read about a state or the local EDC “giving” a company money, it is usually a preferred stock investment they are referring to. 

There are times when a city will grant a company money but these are often large companies (like Fortune 500 companies), a sports team or essential service (like air travel, utilities, etc) they are trying to attract and they expect a large return on their investment from increased tax collections.  But you are looking for money to start your company not expand your fortune 500 so this is hardly a help.

Financial Assistance Payment - In two words I can address this one “Social Services”.  Sure you can get money to pay your bills…it’s called welfare.  Can’t afford to rent go to the local housing office.  Want to buy a home but don’t have a down payment look up the American Dream program.  Child Care Assistance, Heating Bills, Food for the fridge…it’s all out there so long as you meet the low to moderate income requirements. 

In my home town they run a program called “Saving Our Cents” where they will match your monthly savings 2 to 1, on up to $2000in savings.  So you save two grand and your account will have six thousand dollars in it…pretty cool but hardly enough to go out and create a fortune.

Government Contracts - Government contracts are not free money.  Every year the federal and state governments spend billions of dollars…some of that with small business.  But, the federal government is like any other customer they want something in return - like a product or service. 

At times, contracts will include funding for research and development, but these contract only go to established companies.  In fact, most contracts require that you have been in business for two years and have experience selling to the government (usually through subcontracts).  If you don’t meet the experience requirements they will require a certificate of competency to determine if you company can deliver on the contract. 

So if you are a start up working out of your basement looking for free money government contract is probably the last place I would look (unless you have major contacts in the government procurement offices).  I have clients who have been pursuing government contracts for four years or more without a sale…and they have been in business for over a decade.  In any event it is never something for nothing.

So what is the end game? 

I wish I had something witty or inspiring to tell you.  The conversation that must be had when a client wanders in my office looking for grants or free money is often heartbreaking. 

People want to believe that the business they are trying to start is noble and will be an asset to the community - providing good jobs, property taxes, and economic stimulus.  Unfortunately unless that “stimulus” is in the order of 100 or more jobs and a tens of millions of dollars in additional investment by the owners, banks and investors they just are not going to be throwing money at you to get started.

On the other hand, I also want to tell you, Don’t Give Up for two reasons:

  1. I once consulted with a woman who was starting a fitness center in a rural town who was looking for grants.  I told here there were no grants for that type of business and two weeks later she called me and said she found a program that was interested in bringing fitness to areas where there were limited options.  They purchased all of her equipment for her and although I never verified the source I take her at her word.
     
  2.  Who needs grants anyway?!?  Over the last five years of doing this if I have learned one thing it is this; the person who walks in my office and says “I am going to start this business and nothing is going to stop me.” is almost always the person who is in business within the next six months.  The person who walks in and says “Where is the free money?” is usually never seen again.

So pull yourself up by your bootstraps, look the world in the eye and say “I am going to do this!”

Donovan Wadholm
www.DIYBizPlan.com

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