What is the Difference Between a Business Loan and a Grant?
Many reasons can lead to small businesses needing extra incoming cash at any time. It is not uncommon for them to deal with a sudden and vital extended payment from a supplier. Sometimes, they look for ways to manage seasonal cash fluctuations better. Often, they have to deal with non-paying customers. Knowing your options is essential to ease these potentially troubling times before trying to find new opportunities. Grants and business loans are two ways to accomplish this. A few crucial differences between the two will make one type a better option for your business, although they may seem similar.
What is a Business Loan?
The term "business loan" refers to a sum of money that a financial institution, such as a bank or credit union, temporarily provides a small business and repays over time, plus interest. Most of the time, it takes between five to ten years to repay. Businesses may use business loans to start or expand their businesses, pay employee wages, fund marketing campaigns, purchase new equipment or vehicles, or pay for office space.
What is a Business Grant?
Business grants are sums of free money given by private organizations or state, federal, or local governments to small businesses for specific business purposes. Unlike loans, grants don't require repayment; however, to receive a grant, small businesses must meet specific criteria and use the money for the reasons specified by the grantor.
Grants vs. Loans
In general, grants and loans differ in terms of repayment. The difference between a loan and a grant is that a loan requires you to repay the money you borrow, while a grant does not. In essence, grants are gifts. Therefore, there will be no reimbursement.
Regardless of who makes the loan disbursement, the borrower must pay it back with interest within a specific time frame. If the borrower provides collateral—something used as security in case the loan is not repaid—to the lender, the lender may have the right to seize the asset if the borrower defaults.
Businesses frequently obtain loans to launch or grow. Grants for businesses do exist, but they are typically scarce. Even when a grant opportunity does present itself, it is tough to apply for one. Companies usually turn to loans when deciding between grants and loans to get the money they require.
How to Choose Between a Loan and a Grant
You must make a few key business considerations before deciding whether to pursue a business loan or grant. You will know which choice is best for your company once you have determined these factors.
Figure out How Much Money You'll Need.
You must first determine why you are looking for funding and how much you will need. Many funding options are available, but only a few will be appropriate for your company. A microloan or short-term loan might be a better choice if you only need a small amount of money. A grant might be a better option if you require a sizable endowment for research and development.
Select a Funding Schedule.
How quickly do you require the funds, and how well-equipped are you to make the loan payments on time? Grants are more suitable for small businesses that don't require immediate funding because they typically take longer to receive. Even though loans are disbursed more quickly than grants, you must determine how long it will take to pay them back in full.
Determine your Eligibility.
There are distinct eligibility requirements for both grants and loans. Lenders are more concerned with "how" you can repay the money, whereas grantors are more concerned with "what" you are doing with the money. These elements affect the funding you are qualified for.
Final Thoughts
There is no disadvantage to applying for a business grant if you qualify for one - it's free money, after all. Not putting all your hopes on winning a gift is vital since grants are very competitive. Fincrew can help you decide which option is right for you with its SME business loan comparison tool. Innovative entrepreneurs always keep their options open regarding financing business growth. Contact Fincrew today to kickstart the process of financing your business.
