When a small business is just starting or they’re looking to expand, funding is often the number one concern. In this case, small business owners will often look to outside funding sources to cover the costs.
Two of the financial tools that they will use are grants and loans. These words are tossed around in the business world, but what is the difference between them really, and which is the right choice for your business?
Grant vs. Loan: How Business Grants Differ from Business Loans
The defining difference between a grant vs. a loan is, in short, repayment. In other words, a loan has to eventually be paid back and a grant does not. However, there are other factors and pros/cons to consider in this decision for a small business.
Besides the repayment aspect, there are several key differences between business grants and loans.
Firstly, loans are given by a financial institution with repayment terms. The business owner receiving that loan can do whatever they choose for their business with the borrowed money. Of course, this depends on the agreements and stipulations of the loan.
A grant, on the other hand, has the grantor to consider. The grantor is the individual or institution offering the financial resources. Grants are often given only to businesses of a certain type, or for a specific purpose or project.
In other words, the grantor will usually have a say in how the money is spent. This is especially true when receiving government grants, as these typically have to have public benefit in their use.
Positives of a Loan
Although loans require repayment, they give business owners the financial freedom to fund necessary projects. They give owners the chance to expand, evolve, and make changes to their business model.
Loans may sound scary at first, especially at a large sum, but in reality, they are sometimes truly necessary investments. Loans often give small businesses the wiggle room they need to thrive and grow into something extraordinary.
A loan is offered based on your financial soundness, so think of it as an active investment in your business. The money you pour into growing your business from the ground up will be paid back tenfold, and then some.
When considering a loan you may want to consider the wide variety of loans available.
Types of loans include both personal and business loans. When considering if you should get a personal or business loan there is a check out this article.
Personal Loan
While it sounds like common sense requires a small business loan for your company, personal loans are a viable option depending on their purpose. Personal loans are simpler than business loans with fewer borrower requirements. Your financial information is reviewed, including income and credit history, but you typically don’t need collateral. The loans are typically between $1,000 to $50,000 and are repaid between one and five months. These loans don’t have to be strictly for business use.
There are a few things to consider when taking out a personal loan for your business. First, if your business fails to pay back the loan, you are personally liable for the outstanding balance. Second, the interest rates are usually higher with personal loans, and third, this loan doesn’t build business credit.
Conventional Business Loan
Business loans provide funding for business needs such as payroll, equipment, and startup costs. The type of business loan you get depends entirely on the needs of your business. The different loan options include but are not limited to term loans, equipment financing, and invoice financing. The type of loan will decide whether it is short or long-term.
Business loans require a large amount of paperwork, including financial statements and projections. Depending on your credit history, they can be either secured or unsecured. They are not as flexible in their use but come with longer repayment periods and larger amounts. Personal liability is also limited with business loans.
Specialized Business Loans
In addition to loans offered through traditional funding institutions (banks, etc…), the Small Business Administration has several loans available.
SBA loans provide financial assistance to small businesses within specific requirements. They best benefit new businesses that often have difficulty securing conventional loans with a bank. You can learn more about SBA Loans by checking our article SBA Loan Overview: Types, Pros and Cons, and How to Apply.
Downsides of a Conventional Loans
Personal and business loans come with their perceived risks, too.
Conventional Loans are typically the way to go when your business needs money fast. However, borrowing a loan also means coming up with a repayment plan. Loans come with a lack of flexibility. Monthly installments must be paid on time, or else business owners run the risk of negative financial impact or even the possibility of having their loan pulled back. Business owners must have a budget or a financial plan in place to pay loans off in a timely manner.
Conventional Loans can require extensive paperwork. Expect years of tax returns, financial statements, and account documents to tend to. You may have to disclose extensive information about your (and your business partners) financial situation.
Additionally, conventional loans require acute attention to detail and fine-tuned organization. Make sure you have a qualified bookkeeper or financial advisor on your team when paying off your loan. Qualifying for a conventional business loan can be a challenge.
Positives of a Business Grant
Business grants, on the other hand, are given on a competitive basis. There is no repayment required, and money is given freely to support your mission. Businesses that receive grants not only achieve financial freedom but also receive recognition from the grantor.
Grants are designed to help business owners who have historically struggled with gaining funding. The opportunities for ample funding from banks, government aid, or investors can prove sparse. Grants are given with the intention of rectifying this problem, making it all the easier for sprouting businesses.
Grants often come with business training and support. To learn more about Grants, check out An Abridged Guide to Grants for Small Businesses.
Downsides of a Business Grant
While grants can be excellent sources of funding and partnership for some businesses, they can have their downsides.A business grant can take a while to even receive in the first place. There may be a lengthy filing process and a waiting period for the application to be reviewed.
Furthermore, some grantors may be very specific in their qualifications or desires for those using the grant. This means that some businesses may not have what it takes to fulfill the grantor’s wishes.
In some cases, grants are highly competitive and offered to only a small few. Of course, this is not to say that businesses shouldn’t apply for grants, as they are an incredible resource. It’s up to the business owner to not get discouraged by the starkly competitive nature of applying for grants.
Loans or Grants: Which Option Works When Funding Your Business
New and seasoned businesses alike struggle to make the best decision when it comes to choosing between a loan or a grant. The decision comes down to your specific needs and your business’s unique situation.
After reviewing all necessary information, get down to the heart of the matter. What are the needs of your business, and how can you seek to fulfill them? Here are some key takeaways when it comes to choosing between a loan or a grant.
Conventional Loans May Be Best If:
- Your business is already profitable and you’re on the road to financial success.
- You are financially sound and have demonstrated your ability to pay off the loan.
- You need funding immediately. Conventional Loans have a quicker turnaround than grants.
- You want more freedom and control over how you spend the money borrowed from your loan.
Grants May Be Best If:
- You’ve struggled to procure funding from investors or banks, and have exhausted all of your options.
- Your business benefits the community on a local or global scale. Your business focuses on important social issues and seeks to remedy them.
- You aren’t in urgent need of funding, and you’re willing to play the waiting game.
- You’re willing to accept the grantor’s terms and restrictions.
- You find a grant that aligns with the values and mission of your business, or is looking to focus on businesses that may meet your background
The bottom line is that both loans and grants serve a necessary purpose in encouraging business success.