Wondering how do business grants work? A funder sets eligibility rules, awards money in stages for a defined project, and expects you to meet its conditions. U.S. SBIR and STTR programs show the pattern.
This explainer is part of our wider guide to business grants.
| Item | Value |
|---|---|
| SBIR Phase I award range | $50,000 to $250,000 |
| Phase I length | Six months up to one year |
| Phase II award | Generally $750,000 for two years |
| SBIR funding awarded, fiscal year 2019 | Over $3.2 billion |
| STTR funding received, fiscal year 2019 | Over $429 million |
| Company size limit (including affiliates) | 500 employees or fewer |
These figures come from the U.S. Chamber of Commerce’s CO- article on funding small business research, published January 24, 2024. They describe U.S. federal programs and can change, so check the source and the funding agency before you rely on them.
Who funds business grants, and why?
Funders give grants to meet their own goals, so the money comes with a purpose. The U.S. SBIR and STTR programs, for example, are designed to stimulate innovation, provide for federal research and development needs and increase private-sector commercialization, according to the U.S. Chamber of Commerce’s CO- article (January 24, 2024).
The same article says the U.S. Small Business Administration (SBA) reports that thousands of small businesses receive grants annually. It also states that over $3.2 billion was awarded through SBIR in fiscal year 2019, and that small businesses received over $429 million through STTR in that year.
As of that January 2024 article, 11 agencies take part in SBIR. It names the Department of Agriculture, the Environmental Protection Agency and the Department of Transportation as examples. For STTR, the same source lists these participating agencies:
- Department of Defense
- Department of Energy
- Department of Health and Human Services
- National Aeronautics and Space Administration
- National Science Foundation
Our separate explainer on what is the SBIR program covers the first of these programs in more detail. Grant rules vary by provider and by country, so treat these U.S. programs as one worked example rather than a template for every grant.
What conditions do funders attach?
Every grant programme sets eligibility conditions before it considers an idea. According to the U.S. Chamber of Commerce’s CO- article (January 24, 2024), a business interested in SBIR or STTR must meet criteria such as these:
- It operates a U.S. location.
- It is majority-owned by a U.S. citizen or lawful permanent resident.
- It operates as a for-profit entity.
- It has 500 employees or fewer, including employees at affiliates.
- It is focused on research and development.
There are conditions about people as well as company structure. The article says that for SBIR, the principal investigator must be employed over 50% of the time during the award period by the small business, although a participating agency can waive this requirement.
Ownership by investors does not automatically rule a business out. The article says that where a business is owned by a partner such as a private equity firm, hedge fund or multiple venture capitalists, SBIR awards are still granted as long as none of them owns a majority of the business.
STTR adds a partnership condition. The same source says those interested in STTR need a formal partnership agreement with a nonprofit research institution located within the United States.
How do grant phases and timelines work?
Many grants release money in stages rather than all at once. The Chamber article says SBIR and STTR operate in three phases, and each phase has a different purpose and a different funding rule.
As described in the January 24, 2024 article, the phases run as follows:
- Phase I: projects are evaluated to determine their potential impact and feasibility. Awards of $50,000 to $250,000 are granted, and depending on the program the phase can last for six months or up to one year.
- Phase II: research and development efforts already started continue. The findings of Phase I influence the funding, which is generally $750,000 for two years.
- Phase III: small businesses have the possibility of commercialization. No funding is given to organizations in this final phase.
The practical lesson about timelines is that the stages follow one another. Phase II funding depends on what Phase I finds, so a later award is not something a business can count on when it starts.
What costs and risks should you weigh?
A grant is not free of effort or uncertainty. The phase structure above shows several built-in checkpoints where a project can stop, and the source describes no guarantee of moving from one phase to the next.
These are the main points to weigh, based on the conditions described above:
- Eligibility rules on ownership, location, size and focus may exclude your business before you apply.
- Phase I is an evaluation of impact and feasibility, so an idea has to hold up under review.
- Staffing rules, such as the principal investigator employment condition for SBIR, shape how you organise the project.
- Phase III brings no grant funding, so any commercial work has to be financed another way.
Terms, award sizes and deadlines vary by provider and country. Read the funder’s own published rules rather than relying on a summary, including this one.
What if you do not qualify for a grant?
Not every business fits a grant programme. The Chamber article quotes Becca Hoeft, CEO and Founder of Morris Hoeft Group, who recommended looking beyond government grants and exploring universities and research institutions, as many of them focus on collaborative projects.
The same article adds that there are plenty of options for general business funding, such as commercial loans and crowdfunding. Each has its own costs and obligations, and our comparison of grants vs loans for small business explains how the two routes differ.
Frequently asked questions
Do all business grants work like SBIR and STTR?
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No. The source used here describes only U.S. federal SBIR and STTR programs, and grant rules vary by provider and country. Check the rules of the specific funder.
How large is a Phase I award?
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The U.S. Chamber of Commerce’s CO- article, published January 24, 2024, says Phase I awards are $50,000 to $250,000. Check the agency’s current rules before relying on that range.
Can a business with outside investors still qualify?
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According to the same January 2024 article, SBIR awards are still granted to businesses owned by a private equity firm, hedge fund or multiple venture capitalists, as long as none of them owns a majority of the business. STTR also needs a formal partnership with a nonprofit research institution in the United States.
Does Phase III provide grant money?
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No. The same article says no funding is given to organizations in this final phase, which is about commercialization.
This page is for general information and education only and is not financial, investment, tax or legal advice.
