Grants vs. Loans: Which One Is Right for Your Business?

Grants vs. Loans: Which One Is Right for Your Business?

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Your business needs money to grow, and when it comes to funding you have several options. A small business loan gives you some capital now, although you’ll have to repay it with interest over time. A grant will also provide you with money, without repayment, but there are often strings attached. We’ll dig into the differences between small business loans and grants to help you decide what’s right for you.

Making the Right Choice Between Small Business Loans or Grants

There’s typically nothing to stop you from getting a small business grant and a small business loan. It’s important, though, to read the terms, conditions and fine print of each, as you will likely have to disclose other forms of financing, which may impact your eligibility.

For example, a loan provider may not feel the need to offer you more financing if you already have a sizable sum from a grant. You should approach this on a case-by-case basis to understand the requirements for each.

Small Business Grants Could Be a Great Choice If…

  1. You don’t want to pay the money back.
  2. You meet very specific eligibility criteria, as listed on the grant website, application form or other documents.
  3. You write a compelling application and request for funding — hiring a writer specialized in grant applications can be helpful here.
  4. You realize you’re competing with many other businesses for limited funds.
  5. You can wait several months for a decision.
  6. You meet any ongoing criteria for reporting and showing how you’re using the grant money.

Small Business Loans Could Be a Great Choice If…

  1. You understand you must repay the amount borrowed, with interest.
  2. You can manage funds in your business to meet your repayment requirements.
  3. You understand that you may need to offer collateral or personal guarantees for some loans and your liability for doing so.
  4. You complete a thorough application document, together with extensive supporting information.
  5. You realize that interest charged, terms, fees and eligibility can vary depending on your personal and business credit rating and history.

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Starting Points for Small Business Grants

Some small businesses are also eligible to receive grants from various agencies and funds. The great thing about grants is that you do not need to repay them — your business is effectively “gifted” the money so long as you use the funds in a specific way.

Here are some good resources for finding small business grants:

While getting money for free sounds too good to be true, there are a few things to know:

  • Competition for small business grants is fierce, and getting accepted can be challenging.
  • Once funds for a specific grant have run out, that grant will stop accepting applications.
  • There is a rigorous application process that you’ll need to go through, together with lots of required supporting information.
  • Grant requests can take a long time to process.
  • You will probably need to provide follow-up documents and reporting to demonstrate funds are being used as intended.

 

 

Starting Points for Small Business Loans

Small business loans don’t just come in one flavor, there are several different types:

  • Small Business Administration (SBA) loans offered or guaranteed by the government. These may be funded by the SBA itself or offered through a bank or other lender.
  • Traditional loans offered by banks and other financial institutions, repayable over a fixed term.
  • Alternative loans provided by specialist business lenders and others.
  • Invoice factoring and accounts receivable financing providing an advance on payments you have yet to collect.
  • Merchant cash advances and short-term loans for immediate financing needs.
  • Business lines of credit and credit cards for flexible, on-demand financing.
  • Real estate loans and mortgages for purchasing property.

Although the application process, terms of the loan, repayments, etc., differ between types of loans, there are some common factors:

  1. You decide on the type of loan your small business needs.
  2. You gather the required information and fill in the application for the loan.
  3. Your loan gets approved, and you agree to repayment terms and interest charges.
  4. You get capital and make repayments until the loan is settled in full.

Your business bank and the Small Business Administration are both good starting points for loans. Depending on how you want to borrow money, alternative lenders can be a good source too, but realize that their interest rates and fees may be higher.

 

 

Other Ways Businesses Can Get Funding

Small business grants and loans are not the only games in town. You have a few other options for financing, each of which come with their own benefits and challenges.

Digging Into Your Savings

You put your existing personal savings into your business. If you’ve got extra money to spare, and you’re confident in the future of your business, this could be a reasonable option. Be cautious though — raiding your retirement plan or selling stocks can have significant tax implications. Also, if your business fails, you’ll be back at square one, without your savings.

Using Operational Profits to Drive More Growth

You invest the extra money and profits your business is making into new products, services and marketplaces. This is an organic, sensible growth strategy because you don’t need to take on any more debt. Your growth will be limited by your existing bank balance though, which could slow down ambitions or lead to missed opportunities.

Borrowing Money from Family and Friends

You approach your loved ones and ask them to lend you money or invest in your business. This is seldom a good idea — there’s a reason for the cliché “never mix business with pleasure.” It can put a strain on your relationships, and you might not be able to repay people in full.

Using Credit Cards to Fund Business Growth

You use a personal or business credit card to fund your expansion. Credit cards will always have higher interest rates than loans, meaning you’ll end up repaying far more than you borrow. Also, the temptation to “just spend a bit more” on the card can be hard to resist, potentially getting you further into debt.

Venture Capital or Crowdfunding

You sell part of your business allowing others to invest in your future success. There’s a lot of competition for VC investment and crowdfunding. It can also put a lot of pressure on your business to perform.

Although some of these types of funding can work some of the time, loans and grants are often better choices for injecting capital.

We hope you’ve found this comparison of small business grants and loans helpful. Good luck with your application

Incfile | Business Loan Partner | Kabbage
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