Business Grants vs. Business Loans

From startup to expansion and everything in between, running a business is expensive. At some point, you’ll likely need funding from an outside source. Two commonly considered options are business loans and business grants. Both can provide much-needed capital, but they work very differently and come with unique advantages and trade-offs.

We’ll explain how grants and business loans compare and help you determine which funding option makes the most sense for your business.

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What is a business loan?

A business loan is money borrowed from a lender, such as a bank, credit union or online financing provider, that must be repaid over time with interest. Repayment terms typically range from one to 10 years, depending on the lender and loan type.

Business owners use loans for everything from startup costs and expansion projects to equipment purchases and short-term cash flow needs.

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Types of business loans

There are many types of business loans, each with different terms, requirements and use cases. The best business loans and financing options for your business will depend on your goals, cash flow and overall financial situation. Taking the time to understand your options can help you find the right fit for your needs.

Below are some of the most common types of small business financing.

Business line of credit: A business line of credit gives borrowers access to a set amount of funds that they can draw from as needed. Like a business credit card, interest is charged only on the amount borrowed, making this option useful for managing cash flow and unexpected expenses.
Equipment loans: These loans are designed to help businesses purchase or lease equipment. The equipment typically serves as collateral, which can make financing easier to obtain than some unsecured loan options. A farm equipment loan, for example, could help the borrower with tractor, trailer or irrigation equipment purchases. Similar loan options are also available for vehicles and real estate.
Invoice financing and factoring: Unpaid invoices can tie up badly needed cash. Invoice financing allows companies to borrow against those invoices, while invoice factoring involves selling them to a third party in exchange for immediate cash.

Supply chain financing and invoice factoring can both improve cash flow, but they work differently. Supply chain financing allows suppliers to get paid early through a buyer-sponsored financing program. With invoice factoring, the supplier sells its accounts receivable at a discount to a third party for upfront cash.

Merchant cash advance: A merchant cash advance provides upfront funding based on a business’s projected credit card or debit card sales. Repayments are typically collected as a percentage of future sales. While merchant cash advances can be easier to qualify for than traditional loans, they often carry significantly higher costs.
SBA loans: SBA loans are partially guaranteed by the U.S. Small Business Administration, which helps reduce risk for lenders. These loans are popular among small business owners because they often feature lower interest rates and longer repayment terms than many other financing options. SBA loans are available through banks and other approved lenders, but the application process can be more involved than that of other loan types.
Secured and unsecured loans: Secured business loans are backed by a business asset, such as a bank account balance, equipment, vehicle or real estate. Unsecured business loans don’t require the borrower to pledge collateral; they’re awarded based on the borrower’s creditworthiness.
Short-term business loans: These loans are typically repaid within a year and are often used to cover temporary cash flow gaps, seasonal expenses or other short-term business needs.
Term loans: With a term loan, a business receives a lump sum of funding and repays it over a set period through scheduled payments. Term loans are commonly used for major purchases, expansion projects and other significant business investments.

If you're weighing a line of credit vs. a term loan, consider how and when you'll use the money. Lines of credit offer flexibility for ongoing expenses, while term loans are often a better fit for larger, one-time purchases or projects.

What is a business grant?

A business grant is a sum of money awarded to a business by a private organization or a federal, state or local government agency. Unlike a loan, a grant generally doesn’t have to be repaid. However, businesses must meet specific eligibility requirements to qualify, and grant funds typically must be used for the purposes outlined by the grantor.

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

Chandi explained that grants are awarded for a specific purpose and often support broader economic, community or public-interest goals.

“You may have to repay a grant if it’s not used for the purpose it’s awarded for,” Chandi said. “The federal government doesn’t provide grants for paying off debt, covering operational expenses and starting or expanding a business.”

Types of business grants

Top small business grants from government agencies and private organizations are often highly competitive and typically awarded to businesses that meet specific eligibility requirements. Here’s a sampling.

Federal business grants

Federally funded grants are awarded to select small businesses that meet the eligibility requirements of each program. Chandi highlighted the following respected federal grant options:

State business grants

State grants are funded and administered by individual state governments. Depending on the program, they may attract fewer applicants than some federal grant opportunities. Here are some resources:

Local business grants

Local business grants are still highly competitive, but your business may have a better chance of receiving one if you meet all the eligibility criteria. Chandi shared the following grant programs to consider:

Corporate business grants

Similar to government grants, corporate grants provide funding to small businesses, often through contests, pitch competitions or application-based programs. Here are some examples:

Research business grants

Small businesses seeking funding for scientific research and development may qualify for grants awarded specifically for that purpose. Many of the opportunities are available through federal programs such as:

Specialty business grants

Government and corporate grants are available for specific populations. There are, for example, grants for women entrepreneurs and grants for minority-owned businesses. If you belong to an underrepresented or niche demographic, you may be eligible for a specialty business grant, such as:

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, while a grant does not. If taking on debt isn’t practical for your business, a grant may be the better option. That’s the primary distinction, but there are other important differences to keep in mind, including the following.

Criteria

The criteria a lender or grantor uses to evaluate your business can vary widely. Some grants are available only to businesses in specific industries, locations or demographic groups, which can work for or against you depending on your circumstances. 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 managing director at 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.”

Speed

Small businesses should also consider how quickly they need capital. Grants typically take much longer to process than loans. Applying for a business loan can take just a few days. If you need money fast, a loan may be the only practical option.

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

Source

Loans are offered by financial institutions and private lenders, while grants are typically provided by government agencies, corporations and nonprofit organizations. Depending on your business’s needs and eligibility, one funding source may be a better fit than the other.

Crowdfunding may be an option if you're looking to raise capital without taking on debt. When weighing a business loan vs. crowdfunding, consider whether you need fast, structured funding or have a strong community willing to support your idea publicly.

How do you choose between a loan and a grant?

Before deciding whether to pursue a business loan or a grant, take some time to clarify your goals and funding needs. Once you know what you’re trying to accomplish, it becomes easier to determine which option is the better fit.

1. Establish how much money you need.

Start by identifying what you need funding for and how much capital you’ll require. Plenty of funding options are available, but not all of them will be a good match for your situation.

The amount you need can help narrow your options. Smaller funding needs may be a good fit for a microloan or short-term loan, while some grants are designed to support larger projects, research efforts or other specific initiatives.

“With grants, you can get a specific amount of money, whereas with loans, you can get as much funding as you need,” Chandi said. “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.”

Consider writing a business growth plan to help estimate your organization's funding needs. Some lenders may want to see your plan for the capital they're providing, so it pays to be prepared.

2. Decide on a funding timeline.

How quickly do you need the money, and how capable are you of repaying it within a specific time frame? Grants typically take longer to receive, so they’re often a better fit for businesses that can afford to wait through the application and review process. Loans are generally processed faster — some fast business loans may be funded in as little as a day — but you’ll need to think carefully about how long you’ll have to repay the money in full.

“When securing a business loan, personal credit history and score do matter,” Chandi said. “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.”

3. Determine your eligibility.

Grants and loans each have specific eligibility requirements. Grants tend to focus on what you’re doing with the money, while lenders are more concerned with how you’ll repay it based on loan repayment terms. Those factors influence what types of funding you may qualify for.

“Make sure to read the fine print on any loans or grants before accepting them,” Tayne advised. “Grants can sometimes have restrictions on what the funds can be used for, and loans can come with high interest rates 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.”

Ultimately, how much funding you need, how quickly you need it and whether you can repay it — along with the specific criteria you meet — should point you toward the right option. Taking the time to honestly assess each of these factors before applying can save you significant time and energy down the road.

Julie Thompson contributed to this article. Source interviews were conducted for a previous version of this article.

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Written by: Skye Schooley, Senior Lead Analyst

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. At business.com, Schooley covers the ins and outs of hiring and onboarding, employee monitoring, PEOs and HROs, employee benefits and more. 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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