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.
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.
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.
The best invoicing factoring providers can often finance up to 80 percent of the accounts receivables’s value.
You can obtain term loans from many different funding providers, including the SBA, traditional banks and online lenders.
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]
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.
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.
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.
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.
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.
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.
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.
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.”
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]
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.
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.
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.
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.
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.
Mike Berner contributed to this article. Source interviews were conducted for a previous version of this article.