Getting funding for your business is difficult no matter what kind of organization you run. Grants, which are sums of money given to an individual or organization by the government or donors, can help; but they are often difficult to qualify for and win because they’re in high demand.
Many small business grants are available, but the two types most commonly sought are operating and capital grants. Read on to learn their differences, the pros and cons of each grant type, how to apply for these grants and tips to help you decide which grant is right for your business.
FYI: Even though both offer funding opportunities, a grant differs from a business loan in that you don’t have to repay it.
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 other day-to-day costs of running a business. Operating grants are highly sought after, thanks to their unrestricted nature: Organizations are free to use the funds as they see fit.
Since 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 of how it will use the money.
“Generally, operating grants are given to businesses and organizations that have a strong impact in their field,” said Chad Hill, CMO of Hill & Ponton, a firm of disability attorneys for veterans.
Bottom line: Operating grants are coveted and hard to come by. If you can’t get one, consider alternative lending options, including small business loans.
Why do businesses use operating grants to grow their businesses?
Operating grants can be an effective way to grow your business, but you have to be careful. You don’t want to end up spending your time chasing the next grant for constant funding.
Operating grants are best used when you have a specific purpose for the grant. For instance, it’s common for owners to use operating grants to fund a startup without losing equity.
You can also use money from operating grants to take advantage of growth opportunities, shore up inventory, buy expensive equipment or otherwise expand your operations.
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How to apply for an operating grant
Because most operating grants come from individual donors, there is no standard application. Each donor has its own applications and requirements, and not every business is eligible to apply. Some organizations offer 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 are another resource 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, because the money comes from the government, grant recipients are subject to strict compliance measures.
Benefits of operating grants
- You can build a stronger infrastructure. With the gift of an operating grant, your business would have an opportunity to construct a stronger, more sustainable infrastructure that will allow you to carry out your mission.
- They help create trust and credibility. Grants allow your business to build trust and credibility for the organization. Because general operating grants are so competitive, receiving one is often very prestigious and brings your company attention from other donors or revenue sources.
- You can reach higher expectations. The attention a prestigious grant brings also gives your business opportunities to prove it uses good business practices and can live up to expectations.
Downsides of operating grants
- Measuring success can be difficult. The success of operating grants can be challenging to track and measure because the funds’ use is up to your company’s discretion. Still, there are many strict compliance and reporting measures to ensure the money is well spent.
- Reporting results is time-consuming. The receiving organization 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.
- You could get too dependent on the 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 details how you will cover your project costs without the grant.
Tip: Just because you received a grant once doesn’t mean you will next time. Make sure you have a budget for the future in place to manage cash flow and avoid unforeseen issues.
What is a capital grant?
A capital grant is a finite, time-limited subsidy with specific objectives. Also known as capital funds, capital grants are generally issued for the express purpose of gaining capital. Here are some examples of capital grant usage:
- Equipment, furniture and other major material purchases
- Renovation, refurbishment or restoration
- Construction of a building or new facility
- Land purchases
- Historic preservation
Capital grants are 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 to apply for a capital grant
Like the application process for operational grants, there’s no single method for applying for a capital grant, nor is there a specific set of eligibility criteria. Most grants are given by individual donors, the government or independent agencies, and each has its own application process.
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.
Tip: If grants aren’t an option for you, consider one of the best business loans and financing options to find lenders with both flexible terms and affordable rates.
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 need to 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.
Advantages of capital grants
- You can build significant capital. Because you don’t need to pay the government back for a capital grant, it’s a great way to build significant capital for your business without spending large amounts of your earnings.
- You gain 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.
Drawbacks of capital grants
- Processing an application can be difficult. One of the biggest downsides to capital grants is how difficult it is to apply. The application process is time-consuming, and applicants must meet many highly specific criteria to be eligible.
- Reporting measures are complicated. You’ll also be subject to strict compliance and reporting measures to prove you’re using the money effectively for a legitimate project.
- Gains are limited. You get a certain 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.
How to decide which grant is right for you
Operational and capital grants serve two very different functions: operational grants provide money for covering daily overhead costs, while capital grants provide money for capital purchases – such as furniture or buildings. To decide which grant is right for you, you’ll need to look at your business needs and determine whether you have the means to get the funding for it on your own.
The decision to apply for a grant is not one to take lightly. Obtaining a grant is a challenging and laborious process that may cost you money. Before you go through the time and expense of applying, you should be sure it will be well worth it for your organization.
Grant alternatives to consider
Grants aren’t for every business owner. It takes time and effort to apply, and chances aren’t in your favor you’ll be approved. However, there are other ways to access capital.
There’s the venture capital route, for example. 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.
There are also funding routes like crowdfunding, business loans and business credit lines to consider. Invoice financing, business credit cards and equipment financing are other possibilities.
While there’s a cost to borrow – and investors get a piece of your business – these options are all viable ways to bankroll your business if you get turned down for a grant.
Kiely Kuligowski contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.