Find out when — or if — your business could use these two funding tools.
When most people think of business financing, they tend to think of loans. To be fair, many business owners end up taking out a business loan since they’re often the easiest and fastest way to get funding.
But before you fill out that preapproval application, you might want to take a look at grants are available. They’re not for everyone — they’re competitive and come with lots of requirements. But, because you don’t have to pay the money back, they could end up saving you a lot of money.
Check out how loans and grants compare to decide which option could be worth your while.
How do small business loans differ from grants?
Small business loans are funds that you borrow to cover business expenses. You pay back your total principal plus interest and fees. Most small businesses can find lending options, even if they haven’t been around for all that long.
Unlike loans, small business grants are business financing that you don’t have to pay back. They’re often funded by the government, foundations or corporations and designed to help a specific type of business or business owner.
It may sound like grants are free money, but searching and applying for one your business qualifies for takes a lot of time and work. Also, there’s a reason some people make a living writing grant applications: Grants are extremely competitive to get.
Business loans are ideal for:
Business grants are ideal for:
- Educational organizations
- Businesses in economically underdeveloped areas
- Minority-, woman- or veteran-owned businesses
What are the benefits of small business loans and grants?
Small business loans
- Open to most small businesses, subject to minimum revenue and time in business requirements.
- Offers many repayment options for added flexibility.
- You can typically get your funds in just a few days to weeks.
Small business grants
- You don’t have to pay back the money you receive.
- Your business takes on no risk of default.
Compare top online business loans
What are the drawbacks of small business loans and grants?
Small business loans
- You pay back the principal you borrow plus interest and fees.
- Options can be limited or expensive if your business is new.
- Your business takes on the risk of damaged credit and paying fees if you default.
Small business grants
- Fewer options — and, therefore, more competitive to get.
- The application process can be time-consuming.
- It can take a long time to see your funds if the grant is approved.
- You’re typically restricted as to how you can spend the money.
Which borrowing option is better for me?
If your business had been around for over a year and have annual revenue of $100,000+, you could likely qualify for a business loan — meaning a business loan could be a better bet if you don’t qualify for a grant.
Business loans may still be a viable option for businesses that may seem like a good fit for grants. Even if your business, let’s say, is a minority-run education nonprofit in an underserved community, you might still want to consider taking out a loan. Loans can get you funds quickly, and they don’t require the extensive time or staff you’ll need to apply for a grant. They might also be better for businesses that need access to cash to cover day-to-day expenses during an off-season.
That said, grants can be a solid resource if making money isn’t your primary objective. Government and foundation grants are typically designed to help businesses that in some way contribute to a greater social good. (An exception is corporate grants, which focus on building up a specific sector.)
Even if a loan meets your immediate needs, it’s worth exploring whether there’s a grant for your type of business. In some states, you might be surprised to see less competitive business grants for smaller amounts that could help your business expand in the future.
Can I get a loan or a grant if my business is new?Finding a loan or grant for a startup can be extremely difficult. Even the most lenient lenders won’t give money to a business that hasn’t been around for at least six months — and grants can be even more strict.
Loans or grants, they all come down to your business and how quickly you need the money. Grants require investing time and planning, and they’re not guaranteed. Business loans aren’t guaranteed either, though there are more options available. There’s also a chance your business could qualify for both.