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

Getting funding to run 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, can help, but they are often difficult to qualify for and win because they're in high demand. There are many types of grants for businesses, but the two most commonly applied for are operating and capital grants. Read on to learn their differences, the pros and cons of each grant type, and tips to help you decide which grant is right for your business.

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 extremely sought after thanks to their unrestricted nature; organizations are free to use the funds as they see fit.

Because operating grants are so popular, and because the money can be used however the company likes, 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 your organization 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. 

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How to apply for an operating grant

Because most operating grants come from individual donors, there is no one standard way to apply. 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 Catalog of Federal Domestic Assistance (CFDA) is another resource you can use to find available grants, programs, and information about the nonprofit organizations and agencies sponsoring them. [Read related article: Top Small Business Grants of 2020]

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.

Pros of operating grants

With the gift of an operating grant, businesses have the opportunity to build a stronger, more sustainable infrastructure that will allow them to carry on their missions. Grants also give businesses an opportunity to build trust and credibility for their organization. Because general operating grants are so competitive, receiving one is often very prestigious and brings the organization attention from other donors or revenue sources. This attention also gives the organization opportunities to prove it uses good business practices and can live up to expectations.

Cons of operating grants

The success of operating grants can be difficult to track and measure because the use of the funds is up to the discretion of the business itself. Still, there are many strict compliance and reporting measures in place to ensure the money is being well spent. 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 the organization.

Many organizations fall into the trap of relying too much on operational grants to fund their overhead costs and find themselves at a loss if or when they lose the grant. If you receive a grant, it's important to have a strategic plan and operating budget in place that details how you will cover your project costs without the grant.

What is a capital grant?

A capital grant is a finite, time-limited grant with specific objectives. Capital grants, also known as capital funds, are generally granted for the express purpose of gaining capital. Here are some examples of this capital:

• 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 larger, phased capital campaign, so you should not rely on a capital grant to fund all of your 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, the process of applying for a capital grant has no single method or 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, and credit report as well as any support documents the specific application requires.

Again, you can visit Grants.gov or the CFDA to look for applicable grants, and hiring a professional grant writer is often helpful to capital grant program applicants.

Pros and cons of capital grants

Capital grants are a great way to purchase meaningful capital for your business without breaking the bank. However, you need to think carefully about how you will use your grant money and make sure you have a plan for getting further funding, as capital grants are not designed to stand alone in funding your business. [Read related article: What Government Loans Are Available to Entrepreneurs?]

Pros of capital grants

Because you do not 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.

As with operational grants, being awarded a capital grant is a highly competitive process and 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.

Cons of capital grants

One of the biggest downsides to capital grants is how difficult it is to apply. The application is time-consuming, and applicants must meet a lot of highly specific eligibility criteria. You will also be subject to strict compliance and reporting measures to prove you are using the money effectively and honestly for a legitimate project.

Capital grants are finite – you get a certain amount of grant funds to complete a project and no more. This is why it is imperative to have a plan for how you will fund your capital purchases after the grant has run 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 will need to look at what 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, as it is a difficult and laborious process that may cost you money. Before you go to the time and expense of applying, you should be sure it will be well worth it for your organization.