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North Dakota may not be the first place that comes to mind for a start-up that sells high-end bags and accessories, but for Scott Gabrielson, founder of Oliver Cabell, it’s proven to be the perfect launching point. That location has been key to securing the financing he needed, including a $50,000 microloan. Even better, he was able to get $32,500 in grants--money that does not need to be repaid.

Small business grants can be elusive, and the lure of free money has been exploited by scammers who pocket fees from would-be entrepreneurs. But legitimate grant sources do exist, and Gabrielson’s persistence and creativity in seeking funding sources helped him land one.

Originally from North Dakota, Gabrielson took a circuitous route back to his home state. He had worked in Minneapolis in investment banking, followed by a stint at a non-profit. Returning to school to pursue a Master’s degree at the University of Oxford, he says he spent a great deal of time investigating the fashion business, especially high end luxury goods. On a factory tour in Asia, he witnessed traditional European brands--ones that claimed to be made in Italy or Europe--being manufactured.

It was an “aha” moment for him. He realized that high-end bags often cost less than $100 to produce, but were being sold for over $1200. “There was a big discrepancy between quality and brand,” he says. He decided he wanted to find out whether he could sell similar high quality goods to customers at a fraction of the cost, and his company, Oliver Cabell, was born.

But he faced a major hurdle: securing financing for his startup.

The banks he met with were supportive, he says, but were reluctant to lend for an online retail startup with no collateral. Venture capitalists wanted to see traction first, and he knew he’d have to give up a significant amount of equity if he went that route.

He asked himself, “What other sources of funds are out there?”

Through a referral from another business owner who had secured a small business grant, he found the answer in a program called Innovate ND, a program that helps grow small businesses in North Dakota. Though he had incorporated Oliver Cabell in Delaware, Gabrielson established a presence in North Dakota to handle product fulfillment, which made him eligible for the program. In addition to becoming a source of capital, the location offered other advantages, including lower wages and a geographically central location that he expects will make it easier to ship product around the country.

Free Money (Almost)

Innovate ND is a state-funded program that targets start-ups. “We are looking for businesses that are innovative, scalable and can serve customers outside their initial community,” says Jared Stober, entrepreneurship manager with the North Dakota Department of Commerce.

The program enrolls entrepreneurs in phases. In phases one and two, participants get vouchers that can be used toward a variety of resources, including coaching, consulting or marketing assistance. Phase one requires an entry fee of $250 and provides vouchers worth up to $2500, while phase two requires a $500 entry fee which provides up to $5000 in vouchers. The business must meet certain milestones within a specific time frame in order to advance to the next phase.

“The first phase is the most critical,” says Stober. That’s where entrepreneurs try to figure out whether their idea is viable and can make money.

The next two phases both provide grants; up to $10,000 in phase three and up to $15,000 in phase four. The funding for Innovate ND comes from the state government, with the goal of creating a more diverse economy in a state that relies heavily on agriculture and energy production. The program has proved popular, says Stober, adding that last year it ran out of funding.

Stober emphasizes that funding is only one of the benefits, though. Educational centers and the programs they offer guide businesses owners through the process of growing their venture. “Anyone can get money but knowing what to do with those funds is what makes Innovate ND so successful,” he says. “We host educational boot camps that focus on specific topics that every entrepreneur needs to know.”

(Not So) Easy Money

Entrepreneurs seeking grant funding must be careful, though, not to fall victim to a scam. The truth about small business grants is that they can be challenging to find and secure. “Most small businesses do not qualify for government grants,” warns the SBA on its website.

Hal Shelton, a SCORE certified mentor and author of The Secrets to Writing A Successful Business Plan agrees. He offers several tips to help small business owners avoid getting ripped off:

  1. You need to apply for a grant. Grants never appear at your doorstep as a surprise. If someone says they have something for you but you never applied for it, it’s likely a scam.
  2. To apply for a federal grant is free. If someone says you need to pay an application fee, 99.99% chance it is a scam.
  3. Grants are made for some public purpose. It’s public money, so if there is any indication the money is for your personal use, it’s probably not legit.
  4. Often the caller will say they are from the Federal Grants Administration. While it sounds impressive, there is no such thing.

“If you get an overture, and you think it might have some chance (of being legitimate), ask for that information in writing. Chances are, you will never hear from them,” Shelton says.

Even with valid grant programs, there may be misunderstandings on the part of the small business owner about how they work, Shelton warns. The granting organization will have its own agenda and reasons for making the grant, which could be at odds with your reason for seeking funding. “You want to make sure your and the grantor’s purposes are in sync so you aren’t distracted from your mission,” he says.

In addition, you’ll need to understand how funds are disbursed. Is it all up front, or (as is more commonly the case) in phases? If the latter, how will you pay your bills until your receive the money?

Indeed, Stober admits the Innovate ND program isn’t for everyone who thinks they have a great idea for a business. “We are not here to build companies from the ground up,” he says. “We are here to accelerate their process. It’s for those that have that vision, have that direction and want to get there much quicker.”

The program was exactly what Gabrielson needed to help his business get closer to launch, however. The first bags are in production, and he expects to start selling them in May.

His advice to other entrepreneurs who find themselves hitting a wall when it comes to getting financing? “Be scrappy and be resourceful,” he says. “Passion will help you get there, so give it all you got.”

Resources for Finding Grants

Looking for grants for your small business? Consider these resources:

  • Grants.gov allows you to search for federal grants.
  • Check with state and local economic development agencies for information about grants offered to businesses in your county, state or region. If you’re willing to relocate, broaden your search.
  • Contact your local Small Business Development Center (SBDC), SCORE office, Women’s Business Center, Veteran’s Business Outreach Center (VBOC), and/or SBA regional office, which may provide information about opportunities available in your area. (This interactive map from the SBA can help you locate these offices.)

Gerri Detweiler is Head of Market Education for Nav, which allows business owners to check and monitor their personal and business credit scores for free, and helps them find better financing. She is the coauthor of Finance Your Own Business with attorney Garrett Sutton.