Business grants: Sorting out the scams

January 29, 2009: 6:28 PM ET

Grants for small companies are almost as rare as unicorns. Here's how to protect yourself against fraud.

Adriana Matteo, Warwick, R.I.
I'd like to start a small business and need a grant to start. How do I go about it and who do I need to contact? Everything seems to be a scam, but I know there are grants out there for young women who want to start a business.

By Kathleen Ryan O'Connor, CNNMoney.com contributor
You're right to be cautious - bogus claims of free money to start your business and shady outfits promising the moon are everywhere.

While legitimate grants for small business owners do exist, even for startups, they look very different from what you might encounter online. A typical Internet ad will promise thousands even if you don't know the difference between a balance sheet and a balance beam. Real government grants are scarce, tightly targeted toward specific industries, and rigorously competitive. If it sounds too good to be true, it probably is.

Getting a refresher course in that truism cost Donna Hartley of Tahoe City, Calif., a cool $2,500.

A survivor of a major plane crash, cancer and open-heart surgery, Hartley works as a motivational speaker. Interested in raising capital for her management company, Hartley scoured the Internet for leads. She found Grant Financial Network, and in August 2007, she gave the company $2,500 in return for detailed information on grants and assistance in securing them.

Grant Financial Network asked Hartley to authorize payment of the fee as a bank draft, rather than by mailing a check or paying with a credit card. That's a big red flag: Consumer groups warn that an ACH draft or wire transfer is the most difficult kind of payment to delay or dispute.

"Months and months pass," she recalls, with her calling repeatedly and not hearing anything. She eventually received some information from the company, but Hartley says it was nothing she couldn't have found out herself for free - and she never received any grant money.

When Hartley called to try to get her money back, the Las Vegas-based company instead tried to get her to part with an additional $6,500, for which it promised to help her turn her company into a 501(c)(3) charitable organization. The brazen pitch, she recalls, was about how that would make her eligible for even more grant money.

"I feel like I got taken to the cleaners," she says.

When we tried to call Grant Financial Network for a comment, the phone number listed for the company was disconnected. The Better Business Bureau of Las Vegas rates Grant Financial Network as "unsatisfactory." The bureau processed 26 complaints about the company in the last 12 months, mostly over refund issues and allegedly dishonest sales practices. More than half of those complaints went unanswered by the company.

Hartley, still the sole proprietor of Hartley International, has lodged her own BBB complaint, but doesn't expect to see her money again anytime soon.

"I know that grants can happen - I've written grant proposals for the Parent Teacher Association," she says. "It makes you feel very stupid."

John Miller, a spokesman for the Small Business Administration, says there is only one place to look for legitimate government grants: www.grants.gov.

"Speaking for the SBA, we do not provide grants to start or expand a business," he says. "The only grants the SBA administers are for research and development for high-tech companies through our SBIR/STTR [Small Business Innovation Research/Small Business Technology Transfer] programs."

Real grants have very detailed eligibility procedures. Take a look at the specs for this solicitation on grants.gov: "Eligible applicants for this program are non-profit, non-governmental organizations with a nationwide organizational infrastructure. ... Applicants ideally should have state-level constituencies representing all states and territories, but at a minimum representing 20 members including both U.S. states/territories and international members."

Contrast that with this come-on from one of a dozen sites promising free money for your business: "None of these Grants require a credit check, collateral, security deposits or co-signers, you can apply even if you have a bankruptcy or bad credit, it doesn't matter. Its [sic] Free Money Never Repay!"

That said, entrepreneurs with great ideas, even if their business is in its infancy, can sometimes land grants, says Bo Fishback, vice-president of entrepreneurship at the Kauffman Foundation, a Kansas City foundation devoted to entrepreneurship. There are opportunities, but they are extremely competitive and often confined to science and technology.

"I don't know hundreds," he says, "but I know of a few."

The state of Missouri, for example, offers a grant for "Phase Zero" companies, which contributes $5,000 toward hiring a grant writer to help land a SBIR/STTR grant. "Those types of programs, state and federal, are in some ways the most obviously legitimate and recommended for startups to go after," Fishback said. "It's about as close to free money as you can get."

Angie Barnett, CEO of the Better Business Bureau of Greater Maryland, warns that now is a particularly vulnerable time for people to get taken in.

"After the holidays people are going to be grasping at every straw, and scam artists know that," she says.

To find legitimate resources for expanding your business, Barnett recommends visiting your local college- or university-based small business development resource center, or a nearby SCORE office. SCORE is a program backed by the SBA that brings together retired business executives and small business owners looking for guidance.

Your local economic development agencies can also point you toward financing resources. For example, your home state, Rhode Island, has a Web site at everycompanycounts.com with an online guide to organizations that assist local businesses. You won't find no-strings free money, but you will find loans available to new entrepreneurs. The Minority Investment Development Corp. is one local agency that focuses specifically on the needs of minority- and woman-owned businesses.

"People need to do their homework to be directed toward those [resources] which are legitimate," Barnett says.

Barnett has a list of warning signs that a grant offer is fishy:

-Grants are usually given to non-profits, and rarely go to small businesses for personal gain.
-The government - federal, state and local - does not make phone calls or send e-mails soliciting people to apply for grants. "If all of a sudden you start to get marketing or advertising, that's a tell-tale sign," she says.
- Be wary if you're asked to pay any kind of up-front processing fee. "One consumer reported they called it an 'attorney's fee,'" Barnett says.
- If you're asked for your bank information, case closed: It's a scam. "They're fishing," Barnett says.
-Finally, don't be deceived by logos or graphics that appear to offer official endorsements. They're easy to fake, and can lend a false air of legitimacy.

Give us your advice: Check out recent "Ask & Answer" questions.

Related links:

Can I get a loan after bankruptcy?

Raising cash for a fast-growing business

Securing small business loans in a melting economy

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