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Updated Jan 03, 2024

What’s the Difference Between a Grant and a Business Loan?

Learn whether a business grant or business loan is better for your company.

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Skye Schooley, Senior Lead Analyst & Expert on Business Operations
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Running a business is expensive, plain and simple. At some point, there is a good chance you’ll need to seek additional funding from an outside source. Among the ways to do that is through a business grant or a business loan. Although the two may seem similar, there are a few key differences that will make one type the better option for your business. Learn about the different financing available to you, how to choose between them and the best funding providers below.

What is a business loan?

A business loan is a sum of money that a financing institution, like a bank or credit union, temporarily gives to a small business with the expectation that it will be paid back over time with interest. Loan repayment periods typically range from five to 10 years. A business loan can be used for expenditures like starting or expanding a company, paying employee wages, funding marketing efforts, purchasing new equipment or vehicles, or paying for office space.

>>Read About: Business Loan Calculator

Types of business loans

Business loans are vast and plentiful, so small business owners should be diligent in vetting various loan terms to secure the best financing for their enterprise. Here’s a sampling of some of the most common types of small business loans

  • Business line of credit: This financing option is an arrangement between a small business owner and a bank or financial institution in which the borrower has the flexibility to access a specified amount of money at any time. Similar to how a credit card works, a line of credit enables the borrower to repay the amount they spend via minimum monthly payments and only pay interest on the amount they use.
  • Equipment loans: These loans are given specifically to fund the purchase or lease of business equipment and are typically based on the value of the equipment you are acquiring. Similar loan options are also available for vehicles and real estate.
  • Invoice financing and factoring: With invoice financing, a small business owner can borrow money against their outstanding accounts receivable, whereas with invoice factoring, a small business sells their accounts receivables to a lender who will collect on them.
Did You Know?Did you know
The best invoicing factoring providers can often finance up to 80 percent of the accounts receivables’s value.
  • Merchant cash advance: A merchant cash advance is a type of funding given to a small business based on the company’s anticipated credit card transactions for a specified term. The borrower then makes repayments based on a portion of their credit card sales. Merchant advances are typically only a good choice for businesses that have a high volume of credit card sales but are unable to secure a traditional loan because of poor credit.
  • SBA loans: An SBA loan is a highly competitive loan guaranteed by the U.S. Small Business Administration. These loan programs are popular among small business owners because of their low interest rates and long repayment periods, making SBA loans cheaper than alternative sources of funding. SBA loans are available from banks and other lenders, but because a portion of the loan is guaranteed by the government, the application process is longer.
  • Secured and unsecured loans: Secured business loans are loans backed with a business asset (e.g., a bank account balance, equipment, vehicle or real estate). Unsecured business loans don’t require the borrower to pledge such collateral, and instead are awarded based on a borrower’s creditworthiness.
  • Short-term business loans: A short-term loan is a type of term loan that is typically repaid in less than a year with floating or fixed interest rates. They are typically available for businesses that may not be eligible for a line of credit.
  • Term loans: A term loan is a financing agreement where a small business borrows a lump sum of money and repays it over a specified period of time with a fixed interest rate. Common types of business term loans include bridge term loans, multiyear term loans, SBA term loans, asset-based term loans and equipment term loans. 
FYIDid you know
You can obtain term loans from many different funding providers, including the SBA, traditional banks and online lenders.

What is a business grant?

A business grant is a sum of free money that a private organization or a federal, state or local government gives to a business to use toward specific business functions. Unlike loans, grants don’t have to be repaid; however, small businesses must meet very particular criteria to receive one, and they must use the money for reasons specified by the granter.

“Business grants are not easily obtainable,” Nick Chandi, co-founder and CEO of ForwardAI, told business.com. “Your business needs to meet certain requirements.” 

A grant, Chandi said, “is given for an authorized and specified purpose only that usually aims for public good. You may have to repay a grant if it’s not used for the purpose it’s awarded for. The federal government doesn’t provide grants for paying off debt, covering operational expenses and starting or expanding a business.” [Read related article: Top Small Business Grants]

Types of business grants

There are several types of business grants offered by governments and private organizations. Grants are highly competitive and are only given to businesses that meet a specific set of criteria. Here are some popular options.

Federal business grants

Federally funded government grants are awarded to select small businesses that meet each grant’s respective criteria. Chandi highlighted the following primary federal grant options.

State business grants

These grants are similar to federal business grants, except they’re awarded by state governments and are slightly less competitive. To find a state grant, check the following resources.

Local business grants

Another funding option is a local business grant. Although these are still highly competitive, your business has a better chance of receiving a local business grant than a federal or state grant, assuming you meet all the criteria. Chandi shared these grant programs for consideration.

Corporate business grants

Similar to government funding, corporate business grants from private corporations provide aid to small businesses, typically through some form of competition. Some corporate grant options include the ones below.

Research business grants

Small businesses seeking funding for scientific research and development can access grants that are awarded solely for this purpose. Many of these grants can be found through federal programs such as the following.

Specialty business grants

Government and corporate grants are available for specific populations, like women entrepreneurs and minority-owned businesses. If you fall within an underrepresented or unique demographic, you may be eligible for a minority business grant, such as those listed below.

What is the difference between a loan and a grant?

The biggest difference between a loan and a grant is that a loan must be repaid and a grant does not need to be. If you cannot repay funding, a grant may be the better option. Although this is the primary distinction between the two funding types, there are other differences small business owners should be aware of.

For example, the criteria a lender or grantor evaluates you on can vary. Only companies that operate in select industries and locations may be eligible for specific grants — which can be a benefit or a disadvantage, depending on your business. In contrast, lenders are more focused on your financial health and ability to repay the loan.

“Small businesses can qualify for grants based on their demographics or industry,” said Leslie H. Tayne, founder and head attorney of Tayne Law Group. “For loans, lenders take your credit score and finances into consideration when making a lending decision. From checking the internet to requesting bank statements and business plans, small businesses may find that applying for a loan requires they provide much more information than a grant.” 

Bottom LineBottom line
Small business grants often require less documentation than small business loans.

Small businesses should also consider how quickly they need the capital. Grantors typically take much longer to approve applications and disburse funds than lenders do. If you need money immediately, a loan may be the only option.

“Unlike with grants, small businesses can apply for loans and receive funding whenever they need financing,” said Tayne. “If a small business needs immediate funding with no restrictions, seeking out a loan is the better option.” 

Additionally, loans are offered by financial institutions and private lenders, whereas grants are provided by various governments and corporations. Depending on your professional connections, it may make sense to seek funding from one source or the other. [Read related article: How to Apply (and Get Approved) for a Business Loan]

How do you choose between a loan and a grant?

When deciding whether you should pursue a business loan or a grant, there are a few major business points you need to establish. Once you determine these points, you will have a better idea of which option is best for your business.

1. Establish how much money you need.

First, you need to know what you are seeking funding for and how much money you’ll need. There are several funding options out there, but only a select few will be suitable for your business. If you only need a small amount of funding, maybe a microloan or a short-term loan is the better choice for you. If you need a significant endowment for research and development, perhaps a grant is better.

“With grants, you can get a specific amount of money, whereas with loans, you can get as much funding as you need,” said Chandi. “Moreover, there are limited numbers of grants available, whereas you don’t have to compete with anyone to get a loan. Therefore, it’s always important to research and check the benefits and drawbacks associated with grants and loans to see what funding suits your needs the best.”

To estimate your organization’s funding needs, it will help to write a business growth plan. Some lenders may want to see your plan for the capital they’re providing, so make sure you’re prepared. 

2. Decide on a funding timeline.

How fast do you need the money, and how capable are you of repaying it in a certain time frame? Grants will typically take longer to receive, so they are better suited for small businesses that don’t need immediate funding. Although loans are given out quicker than grants, you have to assess how much time you need to repay it in full.

“When securing a business loan, personal credit history and score do matter,” said Chandi. “Also, there are no hard-and-fast rules to secure a business loan — some lenders might provide you loans when you have more debts but a healthy cash flow too. Alternative lenders, such as online and nonbank lenders, are changing the face of small business lending and providing loans easier and faster than a bank — as little as 48 hours.”

If you need the money right away, make sure you look into types of fast business loans

3. Determine your eligibility.

Grants and loans each have specific eligibility requirements. Granters focus more on “what” you are doing with the money, whereas lenders fixate more on “how” you can repay the money. These factors play into what funding you’re eligible for.

“Make sure to read the fine print on any loans or grants before accepting them,” said Tayne. “Grants can sometimes have restrictions on what the funds can be used for, and loans can come with high-interest fees and other fees you may not be aware of until it’s too late. Check your city or state’s local business associations and other resources for help regarding loans and grants.” [Read related article: Hidden Gotchas in Your Business Loan Repayment Terms]

Ultimately, how much funding you need, how soon you need it and can repay it, and what criteria you meet should steer you in one direction or the other.

The best business loan and financing options

Small business owners can choose from a wide variety of funding providers, including traditional banks and the SBA. However, these institutions often impose onerous eligibility requirements. Some of the best business loan and financing options for fast funding include fintechs, alternative lenders and funding marketplaces. Below are our top recommendations.

  • BusinessLoans.com: This funding marketplace uses proprietary algorithms to match small businesses with lenders. Loans are available for up to $3 million, and the platform is willing to work with startups. Learn more in our full review of BusinessLoans.com.
  • Biz2Credit: Like BusinessLoans.com, this is a marketplace lender. The lenders on its platforms offer term loans ranging from $25,000 to $500,000. Get information on the application process in our detailed Biz2Credit review.
  • Fundbox: This online lender specializes in facilitating business lines of credit. Fundbox provides up to $150,000 in funding. The company also boasts a mobile app and an integration with QuickBooks. Our Fundbox review breaks down these features.
  • SBG Funding: This alternative lender provides flexible terms and loans of up to $5 million. In our comprehensive SBG Funding review, see all the loan types available, as well as the documentation required when applying.
  • Rapid Finance: As its name implies, Rapid Finance provides fast funding for small businesses. See the timeline, minimum requirements, and pros and cons of working with this lender in our review of Rapid Finance.

Mike Berner contributed to this article. Source interviews were conducted for a previous version of this article. 

author image
Skye Schooley, Senior Lead Analyst & Expert on Business Operations
Skye Schooley is a dedicated business professional who is especially passionate about human resources and digital marketing. For more than a decade, she has helped clients navigate the employee recruitment and customer acquisition processes, ensuring small business owners have the knowledge they need to succeed and grow their companies. In recent years, Schooley has enjoyed evaluating and comparing HR software and other human resources solutions to help businesses find the tools and services that best suit their needs. With a degree in business communications, she excels at simplifying complicated subjects and interviewing business vendors and entrepreneurs to gain new insights. Her guidance spans various formats, including newsletters, long-form videos and YouTube Shorts, reflecting her commitment to providing valuable expertise in accessible ways.
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