Whether you need a boost of capital to get your startup off the ground, or are an experienced entrepreneur ready to expand, at some point, most business owners need funding from an external source. Many will have to decide between a small business grant vs loan.
Loans and grants are two of the most common ways to fund your business. Although the two are similar, there are a few important differences to understand before you decide which is the best option to bankroll your business.
What is a grant?
A grant is a sum of money awarded to individuals, businesses, or institutions for a specific purpose. A grant is free financial assistance that does not need to be paid back, but the receiver does need to meet certain criteria in order to secure one.
Grants are commonly given by government departments, trusts, or corporations. Business owners typically need to submit an application in order to apply for a grant. The small business grants application process can often be long, requiring large amounts of paperwork and a lengthy selection process as candidates are evaluated and shortlisted.
Advantages of a grant
- Grants don’t need to be repaid, which means you don’t need to factor monthly payments into your business plan or worry about managing debt.
- Unlike loans, which could impact your credit rating if not repaid, grants are free of financial risk.
- Winning a grant often comes with positive publicity and prestige for you and your business.
Disadvantages of a grant
- Meeting the minimum qualifications for a grant doesn’t mean you’ll actually receive one. Competition for grants can be high and they can be difficult to obtain.
- The process to receive a grant can be slower compared to the steps needed to secure a loan, which could be a drawback if your business needs funds immediately.
- Grant applications can be complex and lengthy, sometimes requiring applicants to hire a grant writer or expert to help navigate the process.
- The amount of money available through a grant is fixed and it’s typically less than an average loan amount, so a grant alone may not be enough to finance your business goals.
What is a loan?
A loan is a sum of money temporarily given to an individual or business with the requirement that it be paid back, with interest, within a certain time period. Loans are typically given by banks, but private lenders or individuals, such as family and friends, can also offer loans.
A loan can be used for a range of purposes, from expanding your business to funding a marketing campaign. If the loan recipient fails to repay the funds, the lender may have the right to take their assets as a way of recouping the debt.
Advantages of a loan
- Loans are virtually limitless in number provided that you qualify for them, compared to the finite number of grants available, which means they offer more opportunities to successfully secure funding.
- Entrepreneurs can apply for as much loan funding as they need to finance their business development, as opposed to the amount of money available through grants, which is fixed.
- While there’s certainly plenty of paperwork involved in applying for a loan, many entrepreneurs find answering business loan questions simpler than writing a grant proposal for a business.
- Loan funding can be obtained fairly quickly, compared to grants which often take a long time to receive.
Disadvantages of a loan
- Loan funding needs to be paid back, which means your business has to generate enough revenue for you to comfortably make monthly payments without stretching your finances.
- Borrowers often need to provide collateral in case they are unable to repay their loan, which means putting your assets, such as property, at risk.
What is the difference between a grant and a loan?
The primary difference between a grant and a loan is that a loan must be repaid eventually, while a grant is essentially a gift of money.
Grants and loans also tend to come from different sources. Grants are most often distributed by the government or foundations and non-profit organizations. Loans, on the other hand, usually come from financial institutions.
Business loan types
Let’s take a closer look at the different kinds of business loans to see if one is the right fit for your business.
Banks are the most common and reliable source of funding for small businesses. There are a range of loan types available from banks, including term loans, which are repaid over a specified time period through monthly payments. Banks also offer business lines of credit, which are similar to credit cards, giving the borrower access to a specified amount of money at any time. The borrower repays the amount they use via monthly payments.
Government small business loans
There are a number of loans business owners can apply for through the federal government via the SBA or Small Business Administration.
Alternative lender loans
Alternative lenders are types of companies, other than traditional banks, that can provide loans. They often offer similar types of loans as banks, such as term loans and lines of credit, as well as innovative funding solutions such as peer-to-peer loans, which bring together borrowers and investors via an online platform.
Business grant types
US business owners may be eligible for hundreds of different grants depending on their industry, but most grants can be categorized into three main types based on their source.
Federal and State government grants
Federal and state government grants provide funding for a wide range of industries. From wage subsidies to financing for research, there’s a huge variety of government grants available for small businesses of all kinds and sizes.
The easiest way to narrow down the long list of government grants available is to search via the official government website, which will show you grants your business may be eligible for based on your industry, needs, and goals.
Private-sector funding is financing provided by an individual or private company. There are several common sources for private-sector grants:
- Business incubator: A business incubator is an organization that helps drive the growth of new companies.
- Business accelerators: Similar to a business incubator, business accelerators support companies with funding, mentorship, office space, and other important assets. Accelerators typically work with companies that are further along in their business plan than incubators.
- Angel investors: Angel investors are wealthy individuals who choose to invest their money in small businesses. Grants from angel investors can come as one-time cash gifts or as regular payments. In addition to money, angel investors often provide support with mentorship and networking, and usually expect to receive a stake in your company in return.
Many types of nonprofit organizations in the US offer grants for small businesses. Some common nonprofits that provide grants include associations, business development corporations, center of excellence, private foundations, and universities. The types of nonprofit funding for which your business may be eligible will depend on your industry and business goals.
How to choose between a loan and a grant
Here are a few points to consider when deciding whether to apply for a loan or a grant.
How much money does your business need?
Consider which business goals you hope to achieve through financing and how much money you require to achieve them. Grants, which tend to be smaller, fixed amounts, may not provide all of the funding your business needs to get to that next step.
It’s also a good idea to outline the monthly payment amount you can reasonably afford. If you’re concerned about your ability to make monthly payments on a loan, a grant may be a better option since you won’t need to repay the money..
What’s your business funding timeline?
Think about how soon your business needs this influx of capital. It often takes longer to be approved and receive funds from a grant than a loan, making grants better suited to businesses that don’t have an urgent need for capital. If you need money as soon as possible, a loan may be a better option.
What is your eligibility for a business loan or grant?
Grants and loans have specific, but different, eligibility requirements. Grants are often tied to the location and industry of your business and typically focus on what you plan to do with the funding, which usually needs to contribute to some kind of public good.
Lenders, by contrast, usually focus on your overall financial health and how you will repay the money. You may decide that a grant or a loan is a better fit for your business based on which you are more likely to qualify to receive.
Whatever type of funding is right for your business, securing the capital you need to achieve your goals can be an exciting step toward taking your business to the next level of success.
Ready to start, grow or expand your business with a loan?