Grants vs. Loans: What Makes Business Sense?

Deciding whether grants or loans are the best funding option for your business

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New small business owners may need startup funding before launching their company. And current business owners might use a little extra funding to take their venture to the next level. Throughout every stage of a business’ life cycle, being aware of available financing options is beneficial, including grants and loans.

Entrepreneurs may wonder: Is a grant a loan? How are loans and grants different? Here’s what small business owners should know.

Grant vs. loan: What’s the difference?

Two common funding options business owners may consider are grants and loans. While both types of financing can provide businesses with working capital, there is a difference between grant and loan funding.

Grants don’t need to be repaid. Federal government agencies, non-profits, and private corporations may offer this type of lump-sum gift funding to eligible businesses that apply. Since there’s no obligation to repay grants, the application process is often slow and has many applicants, with companies needing to meet stringent criteria to qualify. In many cases, grant funds also come with conditions for how the money may be used (e.g., a job training grant has to support existing employees).

Loans, by contrast, need to be paid back. Traditional banks and online lenders offer loans to borrowers who repay the funds with interest and/or fees and within a specified period of time. These loan terms are mutually agreed upon before lenders provide the funds. The borrower may have to pledge an asset (like accounts receivable, inventory, or real estate) as collateral. Loans are typically more accessible and available more quickly than grants. They could also be more flexible; borrowers can often use the loan funding with wider discretion subject to the loan agreement.

Grants

A business grant provides much-needed funding that doesn’t need to be paid back. Typically, a grant is given to a business in need that meets some specific criteria, and the business must meet the grant benefactor’s eligibility requirements.

Grants may be more difficult to get if a business is in the startup phase because requirements are usually very stringent, and a business owner typically needs some time in business to qualify. If a company is in the growth phase, however, grants are a great source of funding to consider.

Finding grants to apply for

Since business grants cater to varying demographics and industries, business owners should investigate which options they qualify for. A potential starting place is Grants.gov, which offers a searchable database of grants, including federal grants, available to businesses supporting the development and management of government-funded programs and projects.

While the Small Business Administration (SBA) does not currently provide grants for starting or expanding a business, it does sponsor grants to institutions that provide counseling and training programs for entrepreneurs. Business owners could also look for funding opportunities through their respective state or local governments.

Loans

The more diverse — and possibly more opportunity-filled — category for funding is business loans. These come in a variety of shapes and sizes. There are small business loans offered by private lenders and organizations backed by the SBA. These may be good for a business at any stage in the life cycle. Then, there are working capital loans, which may be ideal for ensuring owners have funds when needed, whether it’s to pay suppliers or meet other day-to- day expenses.

A business line of credit is another loan option to consider. While a business owner is approved for a specific amount, they may not have to take the loan proceeds all at once — or ever. Instead, a business owner often can take out what they need when they need it. If they know a certain time of year is slower for sales, business owners could borrow what they need to get through until business picks up. Repayment for a line of credit may also be flexible, which might come in handy.

Is a grant better than a loan?

Even though grants don’t require repayment, they aren’t necessarily the better funding option for small businesses. It typically takes more time and effort to apply for a grant. Grants’ high demand and strict eligibility requirements come with a lower likelihood of approval compared to loans. Grant funding may also be earmarked for a particular purpose (such as research and development or technical assistance), whereas loans may possibly be utilized with fewer restrictions.

Grants vs. loans: Which is better for a business?

To determine whether a grant or a loan is best for a business’ needs, they may want to consider several factors, including:

What the funds will be used for
When the funds are needed
How long a business owner needs to pay it back

What’s the objective?

What a business needs the money for will determine which path an owner may take. For example, if a business owner sees a cash crunch on the horizon and is worried about paying payroll next month, a working capital loan may be the best fit to see them through the rough patch. If they’re making big-picture plans for expansion or growth, a small business loan might be better.

Understanding what they plan to use the money for will help business owners apply for a loan or grant. They might be required to present a budget for the money. Even if they’re not, drafting a budget might help them to determine if the ask will be enough to cover all required expenses and could be a useful step in planning.

What’s the timeline?

If a business owner’s plans are more long-term and they don’t need financing immediately, a grant might be a better option.

The grant application process can take several months, so business owners may not know if they were awarded the grant for a while. Competition for grants may also be fierce, so there’s no guarantee a business will receive what they’ve applied for.

In contrast, a working capital loan may be approved within a matter of days, and, if so, a business owner may be able to receive their funds relatively quickly.

How quickly could the loan be repaid?

Grants don’t require repayment, but loans do. That’s the main difference between grants and loans. Look into the payback requirements — as well as interest rates and fees — before applying for any loan. This way, business owners may be in a better position to determine whether they can make regular payments on that loan.

Finding the right business funding

Business funding is a valuable tool to help launch or grow a business. Business owners can weigh the benefits and drawbacks of various types of funding and the lenders available to them to help make the right choice for their company.

Grants and loans are just two sources of business funding, but they’re among the many important ways to get resources for a business.

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