When you’re just launching your tech startup, every bit of financial help counts. So if you haven’t yet considered Small Business Innovation Research (SBIR) grants, you might want to take a look.
An initiative of the Small Business Administration (SBA), the SBIR program was created to support scientific excellence and technological innovation. Grants are issued to help fledgling companies realize the potential of their basic research. SBIR funds come from federal agencies covering areas like health and human services, agriculture, aeronautics, defense and education.
For many reasons, SBIR grants present an appealing opportunity for startups. The funding is stable (and not a loan), and you retain the intellectual property rights of what you produce. There is also a measure of validation. Given the rigorous reviews by granting agencies, landing an SBIR grant could make your business more attractive to private investors.
If you think an SBIR grant might be in your future, here are five things to know before you get started.
#1: SBIR grants cover a wide range of expenses related to running your business. In addition to direct research costs, you can also use grant funds for salaries, rent, utilities, materials and more. However, they’re not meant for promoting or marketing your products. Costs related to sales, publicity, obtaining patents, entertaining clients and similar expenditures cannot be paid for with grant money.
#2: There are three grant “phases” depending on your business’s stage of development. Each phase of the SBIR grant program is designed for a particular purpose.
- Phase I (maximum award = $150,000).The objective of Phase I is to establish the technical merit, feasibility and commercial potential of your R&D efforts and to determine the quality of performance of your small business before offering additional support later on. SBIR Phase I awards have a six-month period of performance.
- Phase II (maximum award = $1 million).Phase II awards are to help the business continue the efforts it initiated in Phase I. Funding is based on the results achieved in that phase and the scientific and technical merit and commercial potential of your project. Generally, only Phase I awardees are eligible for a Phase II award. SBIR Phase II awards have a two-year period of performance.
- Phase III.In this phase, your business pursues the commercialization objectives resulting from Phase I and Phase II activities. The SBIR program does not fund Phase III awards. Instead, assistance might consist of follow-on research or production contracts for products, processes or services intended for use by the U.S. Government. Any funds received during this phase will not come from the SBIR program.
#3: You draw from your grant as your expenses incur, not all at once. If you get a $125,000 grant, that doesn’t mean a $125,000 windfall. Instead, you request the funds as your expenditures are made. Think of it as an expense account or company credit card. The timing of grant fund receipts and payments to employees and other vendors can be challenging to manage, so some initial working capital (cash) is valuable.
#4: Meticulous record-keeping habits are key. Granting organizations often require thorough records to demonstrate that you’re using the grants properly. Examples of this include employee time records and invoices to support the expenses you incur. This means you need solid accounting and document management systems to fulfil these obligations.
#5: You can use SBIR grants to pay for accounting services. These are considered part of the cost to run your business (as we mentioned earlier). As you’ve seen, there’s a lot to keep in mind when applying for, using and documenting SBIR funds. You’ll want expert advice on managing this money to best facilitate your growth and comply with the rules.
Your best move is to select a CPA firm with professionals dedicated to helping startups in technology-based startups and similar companies. Such a firm offers both the industry and financial expertise needed to guide you through the SBIR grant process—and help bring your startup’s untapped potential to fruition.
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