What’s the difference between grant and a loan?
Congratulations, you’ve decided to grow your small business! Now all you need is financial assistance to get things off the ground for your big project, new hires, holiday inventory or product launch. Small business loans and grants provide great opportunities to make those things happen. Whether your small business has been around for a while or you’re just getting started, we can help you navigate the differences between grants and loans so you can find the ideal funding solution:
How do grants differ from loans
A small business loan is borrowed capital that small businesses use to pay for expenses, like inventory or new employees. A loan requires small business owners to return the money they borrowed by a set period of time, with interest. There are also such things as government-funded business loans, which are similar but the federal or state government act as the lenders.
So if small business loan is borrowed and repaid with interest, what’s a grant? A grant is a financial award that is not expected to be repaid. Usually provided by the federal, state, or local government, grants are seriously pretty sweet because they are essentially free money for your business. Because of this reason, they are often difficult to obtain.
How to qualify for a small business loan
To qualify for a small business loan, business owners have to prove they are able to repay the borrowed amount in full. Lenders determine your trustworthiness as a borrower based on your credit track record, your financial capacity, and your character. Lenders will pull your credit score, request financial documents and bank statements and may even do a little digging on the internet to make sure you own a legitimate business (which is why it pays to have good Yelp reviews). Depending on the lender, you may also have to submit a business plan and marketing strategy to give a clear picture of what your small business is about.
Most grants, like those from the Small Business Administration, require you to create and submit an extensive grant proposal that involves detailing every aspect of your business, such as how you intend to use the funding, how many employees you aim to hire, etc. Grants are available based on your business’s industry or even your demographics—if you are a minority business owner, a women, a single mother or a veteran, there are many grants out there that you can uniquely qualify for. Remember, most grants take time, instant business grants are virtually non-existent.
How to find the perfect fit
When you’re trying to make a decision for your small business on the difference between a grant and a loan, and which of these two funding options is right for you, there are two big factors to consider:
The stage of your business
If your business is younger than a year old or hasn’t even launched, a small business loan won’t be a good fit. Lenders need a track record (even if it’s short) of how your business has succeeded in the past to predict your ability to succeed in the future—startups usually don’t have that.
Alternatively, grants are available to small businesses of all ages, regardless of whether they’ve been around for two months or twenty years. Check out federalgrants.com for a comprehensive list of grants available to small businesses.
How quickly you need the funding
Say you’ve been in business for longer than a year and have a proven financial track record—shouldn’t you still just apply for a grant instead of a loan? After all, free money is better than money you have to pay back, right? Well, not necessarily. This is where time comes into play. If you need money fast, go for a business loan. Some online lenders, such as StreetShares, can fund your small business loan in a week or less.
If you’re willing to put in the time, effort and research, a grant may be worth the trouble. Keep in mind, grants must be appropriated through Congress and the White House and are often closely tied to specific agency agendas, which often places a lot of rules and regulations on how the money can be used. If you’re still reading this, that may be fine for you. However, If you need capital to grow now, don’t waste your time pursuing the promise of “free money”—small business loans can be a lot easier to qualify for and you can often get funded in under a week.
The bottom line difference between a grant and a loan
So now that you know the difference between a grant and a loan you can now make and educated decision. If you’ve got the track record and need your funds quickly, opt for the small business loan. If you’re a fledgling startup and can weather the lengthy grant process for the promise of free money, go for it.
Laura Walton is a freelance writer and contributor for StreetShares. She is passionate about all things social media and public relations as they relate to the topics of small business and veteran entrepreneurship. You can find her on Twitter at @lk_dubs.