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.
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.
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.
Editor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs.
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.
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.
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:
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.”
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.
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.
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.
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.
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.