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SMART ANSWERS
By Karen E. Klein

1.11.00
The Myth of Free Government Money: A Perennial and Pernicious Scam
Why do so many entrepreneurs believe in the Tooth Fairy?


The late-night TV infomercial is so alluring: "Come to our seminar and find out how you can get your government grant to start a small business!" a breathless announcer intones. "Just $300." A smiling entrepreneur assures in a taped testimonial: "I got $40,000 for my small business!"

The bright, red words: "Free Money!" fill the screen. It's an old story, and one that makes small-business consultants, counselors, and advice columnists (this one included) cringe. Whenever such ads run, we brace ourselves for calls and e-mail from entrepreneurs and would-be entrepreneurs who can't wait to get their hands on that free government money — which doesn't exist. Why are people who supposedly want to be hard-headed, no-nonsense business types so gullible? This is a subject the Smart Answers column has addressed before, but I periodically revisit it. That's because these aren't harmless hoaxes. Seminar sellers and book hucksters routinely con people into shelling out hundreds of dollars to hear lectures or purchase directories that contain information readily available (yes, really for free!) in any public library or on the Internet.

"I've been working in small-business development for 16 years, and this urban legend never goes away," sighs John Rooney, a professor at the Lloyd Greif Center for Entrepreneurial Studies at the University of Southern California. "Interest and calls peak when some new book or ad kicks in."

"BRIGHTEST TECH MINDS." Common sense and the most basic awareness of business principles should tell entrepreneurs that no one besides Mom and Dad (maybe) will give you no-strings money to start a for-profit business. "If the government was in the position of providing all of the funds for free to people who start their own businesses, we wouldn't last long," says Mike Stamler, a spokesman for the U.S. Small Business Administration in Washington, D.C. "Not to mention that the American people would never stand for the government setting individuals up in business at no cost, and all at taxpayer risk."

Yet, the myth persists. Like most con artists, the free-money hucksters take a grain of truth and distort it. There are a few highly specific grants for small businesses. A look at the details shows the money is hardly free. It comes with a host of restrictions and quid pro quos. For example, some local agencies give small grants to businesses that locate in poor areas and guarantee jobs to people in an underemployed community, says Phil Borden, director of the Women's Enterprise Development Corp., a Long Beach (Calif.) nonprofit business assistance center.

There are also some very restrictive, difficult-to-obtain grants given to small businesses to research new technologies for the government. "There is something called the Small Business Innovative Research (SBIR) program that gives entrepreneurs up to $100,000 to research an idea that's considered promising and up to $1 million to create products from it, if the research pans out," Borden explains. "The problem is, the promising ideas have to do with things like how to capture a satellite in orbit and repair it. The people who compete with intricate, detailed proposals for these grants are experts in engineering and science and have the brightest technology minds in the country. The notion that this kind of money is available to folks off the street is a joke."

READY VICTIMS. Still, the free-money hucksters find ready victims because people want to believe there's a way around the hard work of raising capital. "So many people say they heard it from a friend or saw it on TV. Of course, they've never actually met anyone who got any free money. It becomes like the Holy Grail of small business, and a lot of entrepreneurs get caught up in this idea that it's out there," Rooney says.

The true believers are amazingly persistent. "About six or eight years ago, there was a scam like this that produced a run of calls," says the SBA's Stamler. "The huckster at the heart of it implied that these grants were there, but the government didn't want to let everyone know about them," Stamler recalls. "He told people not to take 'no' for an answer when they called us."

Rooney says he once ordered a "free-money" book advertised on television.The author claimed every entrepreneur was entitled to a government grant. Rooney received a directory of farmer's subsidies, Housing & Urban Development programs, and government-loan applications.

What about those testimonials from happy entrepreneurs? Listen closely, Stamler says. They usually say they "got" so much government money for their small business — they don't say how. Most of those featured entrepreneurs have gotten small-business loans, he says. The SBA guaranteed more than $16 billion in loans during fiscal 1999 through its three major financing programs.

LEGITIMATE SOURCES. The irony is that in this boom time for small business, there are many sources of loans or equity financing for startups. "Money's not that hard to get from friends and family if you've got a really good idea," says Rooney. "I've seen college students raise millions with their dot.com ideas. Why waste your time with the snake-oil salesmen when you could be talking to professionals who know what they're doing?" After all, it's not as though the average startup needs many millions to get off the ground.

As Jim Weidman, spokesman for the National Federation of Independent Business points out: "Most new businesses are started with a very small amount of money, around $5,000. So people come up with it out of their personal savings or borrowing from their relatives, unless they are buying an ongoing enterprise or starting a business that needs a lot of initial funding for inventory, working capital, or buying or leasing a building."

For more information on funding for startups, visit the SBA's Web site at www.sba.gov. It features extensive information on small-business loans and startup funding. For information on venture capital, visit the Venture Capital Resource Library, www.vfinance.com, the Capital Network, www.thecapitalnetwork.com, or Garage.com, www.garage.com.


Have a question about running your business? Ask our small-business experts. Send us an E-mail at editors@businessweekmail.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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