Capital vs. Operating Grants: Which Does Your Business Need?

What is an operating grant?

An operating grant, also known as an unrestricted grant, is a working-capital fund given to a nonprofit organization to support its general mission and pay for overhead expenses, such as rent, salaries, furniture and day-to-day business costs. Operating grants are highly sought after, thanks to their unrestricted nature: Organizations are free to use the funds as they see fit.

Because operating grants are so popular, the application process is rigorous and competitive. Your organization must prove an impeccable track record, demonstrate strong and responsible leadership, and provide a clear, outlined plan for using the money.

How do businesses use operating grants? 

Businesses typically use operating grants to fund growth. However, you must be careful; you don’t want to end up spending your time chasing the next grant for constant funding. 

Operating grants are best used for a specific purpose. For example, business owners typically use operating grants to fund a startup without losing equity. “Operating grants provide flexibility as they can be used for various expenses necessary to keep the organization running,” Tumbling said. “They are crucial for maintaining the day-to-day functions and ensuring the organization’s stability.”

You can also use an operating grant to capitalize on growth opportunities, shore up inventory, buy expensive equipment, open another business location or otherwise expand your operations.  

How to apply for an operating grant

Because most operating grants come from individual donors, there is no standard application process. Each donor has unique applications and requirements, and not every business is eligible to apply. Some organizations provide an online application, but the application process for grants is so complex that it often requires professional assistance; many organizations hire professional grant proposal writers.

Grants.gov offers information on grants and a handy search tool for finding a grant program that suits your mission. The SAM.gov Assistance Listings resource is also helpful for finding available grants, programs and information about the nonprofit organizations and agencies sponsoring them. 

Pros and cons of operating grants

Because operating grants are essentially a gift from the government — and you won’t have to repay the money — they can give a serious boost to your business. However, it also means grant recipients are subject to strict compliance measures. Here are some upsides and downsides of operating grants.

Pros of operating grants

• Operating grants help you build a stronger infrastructure. With the gift of an operating grant, your business can construct a stronger, more sustainable infrastructure that will allow you to carry out your mission.
• Operating grants help create trust and credibility. Because general operating grants are so competitive, receiving one is often very prestigious and attracts attention from other donors or revenue sources.
• Operating grants can help you reach higher expectations. The attention a prestigious grant brings also gives your business opportunities to prove it uses good business practices and can meet or exceed expectations.

Cons of operating grants

• It can be difficult to measure the success of operating grants. Tracking and measuring the success of your operating grant can be challenging because the funds’ use is up to your organization’s discretion. Still, there are many strict compliance and reporting measures to ensure the money is well spent.
• Reporting operating-grant results is time-consuming. The grant recipient must submit detailed reports on how the money is used, document any accomplishments or failures, and continue to report throughout the grant period if the money is given in stages. This can be time-consuming and stressful for your organization. “Additionally, they may require more frequent renewal, creating funding uncertainty,” Tumbling said.
• You could get too dependent on the operating grant’s funds. Many organizations fall into the trap of relying too much on operational grants to fund their overhead costs. They find themselves at a loss if or when they lose the grant. If you receive a grant, it’s essential to have a strategic plan and operating budget that detail how you will cover your project costs without the grant.
• Not a good fit for projects: “Operating grants may not be as appealing to donors who prefer to see their funds used for tangible projects,” Tumbling said.

What is a capital grant?

A capital grant is a finite subsidy with specific objectives. Also known as capital funds, capital grants are generally issued for the express purpose of gaining capital. They’re often part of a more extensive, phased capital campaign, so you shouldn’t rely on a capital grant to fund your working-capital needs.

“A capital grant will provide a short-term fund for a long-term need,” said Jared Weitz, CEO and founder of United Capital Source. “Capital grants are widely advantageous for businesses looking to acquire materials or tangible assets.”

How do businesses use capital grants?

Businesses use capital grants to purchase real estate or equipment to help them expand. “Capital grants are typically allocated for tangible, long-term investments such as building infrastructure, purchasing equipment or funding large-scale projects,” Tumbling explained. “They are generally one-time grants intended to help an organization expand its capacity or improve its facilities.”

Funding organizations — including government agencies, corporations and private foundations — may be interested in spurring the development of certain industries or businesses in a particular area. The goal is usually to boost economic growth, promote social good, support nonprofits or encourage innovation.

Here are some examples of capital grant usage:

• Equipment, furniture and other major material purchases
• Renovation, refurbishment or restoration
• Construction of a building or facility
• Land purchases
• Historic preservation

If your business can benefit a particular underserved community, you may qualify for a capital grant. For example, a grocery store may be looking to open in a “food desert.” Likewise, industries seen as beneficial to the country, such as semiconductors or green energy technology, may qualify for a capital grant to build a research center or manufacturing facility. Businesses that could potentially provide many jobs in an economically depressed area may also be candidates for this type of funding.

How to apply for a capital grant

Like operating grants, capital grants do not have a specific application process or eligibility criteria. Most grants are given by individual donors, the government or independent agencies, and each has its own application process. When you’re applying for a capital grant, be prepared with your business plan, financial statements, credit report and any supporting documents the specific application requires.

As with operational grants, you can visit Grants.gov or SAM.gov to look for applicable grants. Hiring a professional grant writer is often helpful for capital grant program applicants. “Small to midsize organizations can benefit greatly by collaborating with a grant writing and fund development consultant,” Bisceglia said. “Engaging a consultant is an investment worth the expertise.”

Pros and cons of capital grants

Capital grants are a great way to obtain meaningful capital for your business without breaking the bank. However, you must think carefully about how you will use your grant money and ensure you have a plan for getting additional funding, as capital grants are not designed to completely fund your business. 

Here are some upsides and downsides of capital grants.

Pros of capital grants

• Capital grants can help you build significant capital. Because you don’t have to repay the government for a capital grant, it’s a great way to build significant capital for your business without spending large amounts of your earnings.
• Capital grants bring prestige and credibility. As with operational grants, obtaining a capital grant is a highly competitive process. It comes with a certain prestige, which will add credibility to your company and bring you to the attention of other potential donors and revenue streams.
• Capital grants can help you grow your business. “Capital grants can enable significant growth or improvement,” Tumbling said. “This allows organizations to take on more clients or offer new services. They often lead to long-term impact by enhancing the organization’s capacity.”

Cons of capital grants

• It can be difficult and time-consuming to process a capital grant application. Some of the biggest downsides to capital grants are that they are time-consuming and that applicants must meet many highly specific criteria to be eligible. “They also often necessitate a matching fund requirement, meaning the organization must raise additional funds to access the grant,” Tumbling said.
• Capital grant reporting measures are complicated. When you obtain a capital grant, you’ll be subject to strict compliance and reporting measures to prove you’re using the money effectively for a legitimate project.
• Capital grant gains are limited. You get a specific amount of grant funds to complete a project and no more. This is why it’s imperative to have a plan for funding your capital purchases after the grant runs out.
• Capital grants can be competitive: A detailed plan for execution is imperative for consideration. 

How to decide which grant is right for you

Operational and capital grants serve very different functions. Operational grants provide money to cover daily overhead costs, while capital grants provide money for capital purchases, such as furniture or buildings. 

Choose an operating grant if …

• You need a temporary infusion of cash to support your everyday expenses.
• You meet the grant’s requirements (for example, you have a startup, your business is minority-owned, or you are a veteran).
• You have the time to do the required reporting.

Choose a capital grant if …

• You want to expand your business.
• You must make a significant investment to expand your business. 
• Your expansion meets one or more of the grant’s criteria (e.g., benefiting an underserved community or market, boosting economic growth, serving the public good, or contributing to innovation).

The decision to apply for a grant should not be taken lightly. Obtaining a grant is a challenging and laborious process that may cost you money. Before you invest the time and expense in applying, you should be sure it will be well worth it.

Grant alternatives to consider 

Grants aren’t for every business owner. Applying takes time and effort, and your chances of being approved are slim. However, there are other ways to access capital. “Besides capital and operating grants, organizations can explore a variety of alternative funding options, including endowments, collaborative funding or crowdfunding,” Tumbling said. “Establishing an endowment fund can provide a steady income stream, as the principal amount is invested and the interest is used to support the organization’s activities.” 

Consider these options: 

• Investors: You may consider exploring angel investors and venture capitalists. Many investors are looking for companies at different stages. If you operate a company in growth mode and can convince investors your business is a disruptor, raising funding can be easy.
• Alternative funding: Beyond applying for a business loan, creative funding sources can give your company the capital infusion it needs. Consider crowdfunding, business lines of credit, credit card receivables funding, invoice factoring, business credit cards, equipment financing and more.

Although borrowing comes at a cost — and investors get a piece of your business if you go that route — numerous funding options can help you bankroll your organization if you get turned down for a grant. 

Danielle Bauter and Jennifer Dublino contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.