Are Grants Always Better than Loans?
Once we leave the world of high school and college behind, we usually forget about the power of a well-structured grant.
However, as a small-to-medium business owner in the United States, you could be eligible for many grants — giving you essentially free money.
When your business needs funds to move forward, either to cover overhead or to expand, exploring the avenue of grants is a smart financial step.
You don’t have to repay grants so they’re often a perfect alternative to getting into debt with a loan.
The catch is that grants have a lot of nuances and hurdles that you have to jump through before you get your funds. If you need money fast, a loan or alternative lending solution may be the better option.
This article breaks down the difference between grants and loans and when each is the best financial choice for your business.
1. The Pros and Cons of Grants
In college, you saw grants as financial assistance offered to students. These grants were commonly through the Free Application for Federal Student Aid (FAFSA) by the federal government.
In business, the term “grant” refers to an amount of money given to someone for an intended purpose. Grants don’t have to be repaid and are typically offered by the federal or state government, an organization, or a private entity.
Each grant targets an aim the entity has interest in furthering. For instance, some federal grants act as financial aid to help further women and minorities who own small businesses. Then, you have private grants that are more particular, such as the ones designed for small business owners who are also single moms.
A person with financial needs can qualify for the federal woman-owned business grant and the private single mom grant, as long as she meets both categories’ eligibility requirements. When you do qualify, there are lots of advantages that go along with a grant.
Advantages of a Grant
Of course, the first factor that attracts people to grants is that they aren’t a loan. You don’t have to pay them back as long as you follow the terms of the intended purpose.
Some grants are for small pots of money, while others give out hefty chunks. Anyone interested in applying for a grant has a lot of information to search through. Grants and resources are available for every industry; the trick is finding one that you can qualify for.
Another benefit to getting awarded a grant is that it increases your credibility. You’ve been awarded a grant by another organization, so more entities in the future will see you as worthy of their free money. And when the grantor lists you as the winner, it promotes your business, too. Your name shows up on their website or print media alongside the other grant winners for everyone to see.
Disadvantages of Grants
With all these advantages, there are still some people who will never bother applying for a grant. They claim the disadvantages outweigh the potential outcome.
It’s true that there are some drawbacks to the grant process. Trying to find the perfect grant for your business, especially the first time, can be cumbersome.
Filling out the paperwork after you’ve found it is time-consuming. Grant providers want to know that their money is going where they want it, so there are many lengthy essay-style requirements.
Once you’ve spent hours and hours tracking down and completing the paperwork, there’s no guarantee that you’ll be the award winner. And if you are, make sure you read the fine print closely since there are usually strings attached. If you don’t follow the expectations precisely, you may have to pay back the funds.
If you don’t mind the research and paperwork process, and you know you’re going to use the money as directed, a grant could be the best thing for your business.
Are you a woman-owned small business? Take a look at these Federal Grants for Women: Multiple Grants for Entrepreneurs
2. When Loans Are (or Aren’t) the Best Choice
The entire process of applying for a loan can take months or longer. You have to complete the documentation, wait for the final date for submission to pass, and then see if you win.
Then, it can be a while before funds are disbursed. It’s not beneficial if you need cash fast. At that point, a loan program is the wiser financial solution.
Business loans often get a bad rap, but they can be an incredible tool that propels your company forward. If you use the right type of funding correctly, you can grow, expand, and get out of unhealthy debt.
Yet, every loan option has advantages and disadvantages. Be sure you prepare for these risks that come with borrowing money.
Take Out a Loan With Caution
A business loan isn’t the most straightforward form of financing to get approved for. Owners can’t rely on their business credit; their personal financial history comes under scrutiny, too. The loan’s documents will likely state that the owner will be personally liable if the business doesn’t repay the funds.
Using your assets as collateral does increase your chances of obtaining a loan and can lower the interest rates you receive.
If you have any equipment, real estate, or accounts receivables, you can use as security, the lender sees you as a better risk for them. But if you can’t follow the terms of repayment, you could lose those assets.
All types of loans come with structured monthly repayment expectations. The fact that you need a loan could mean you’re struggling already.
Adding more debt to your monthly overhead is something you should consider carefully.
Can you handle the extra strain on your budget, or might it be the straw that breaks your business’s back?
Related: 5 Things to Know About Small Business Loans
3. Other Funding Solutions to Consider
The good news is that loans and grants aren’t your only financial options. You need money faster than a grant can provide it, but you’re not willing to risk the harsh repayment terms of a loan.
If that sounds like your position, here are some other funding alternatives that may interest you:
Lines of Credit (LOC)
These financial solutions are available online or at a traditional bank. They’re easier to get approved for (and faster) online.
With an LOC, you receive a sum of money that you can pull from any time you need it. Interest charges only on what you’ve borrowed, not the total amount.
It’s a good choice for businesses who want to keep some working capital on hand for slow times, as long as you can handle the loan terms when it’s time to repay it.
Short-Term Loans (STLs)
Similar to a regular business loan, STLs are term loans with shorter repayment periods. These are usually obtained through online lenders instead of traditional financial institutions like banks and credit unions.
You can get your cash fast and use it for anything your business needs. The main difference is that most STLs have very short terms in which you must repay them, and the interest rates are usually high.
Businesses that need a little working capital quickly and know they can pay the debt off, such as seasonal retailers, can benefit from an STL.
Merchant Cash Advances (MCAs)
Business owners who need money fast without a complex loan application process may want a Merchant Cash Advance (MCA). These are easy to get, mainly because the repayment terms are extravagant.
With an MCA, you aren’t taking out any small business loans. You’re getting a sum of money in advance of expected services rendered. Rather than monthly payments, the lender recoups their money and interest out of your daily sales until the debt is paid.
It’s an okay solution for startups or businesses with bad credit, but it should never be your first resort.
Invoice Factoring
When your company relies heavily on invoicing to get paid, you may not need business or personal loans. Invoice factoring through companies like Now gives you the money you’ve already earned without the wait.
Your NowAccount alternative financing solution goes beyond traditional invoice factoring. You sell them an invoice, they pay you the specific amount on the invoice minus their fee, and then they collect the total due from the customer.
Instead of dealing with interest rates every month on top of hidden fees, you get a one-time, flat transaction fee. Even better, no liability or debt shows on your business’s credit score and history. All you’re doing is getting paid faster for revenue you’ve already earned.
For more information related to this topic, read our guides to invoice factoring and spot factoring.
4. Understanding Your Business Needs Before You Choose
Part of deciding on your financing options means evaluating the life-cycle of your business.
Are your needs short-term or long-term? Will the end result be worth the extra money you’ll pay in fees and interest?
As a rule, short-term funding requirements shouldn’t have a long-term payback solution. That’s why government grants and other types of grant money are so attractive.
How Where You Are in The Life Cycle of Your Business Matters
If you can’t qualify or don’t have the time to invest in applying for grants, use your business’s phase to help you decide what kind of financing you need.
Phase One: The Launch
The first phase of a business is the launch. This is where you’re still in a startup, and you’re collecting funds to get your business open and cover overhead.
However, it also refers to the time when you launch a new product or service since you’ll be investing more funds than you’ll likely be receiving.
During this phase, it’s hard to be picky about your loan options because many lenders won’t approve you. Still, be cautious about getting into unreasonable repayment terms.
Phase Two: Growth
The next phase is the growth period. Here, you’ll have increasing sales growth and begin to see a profit. Profits won’t be as high as sales because of overhead, but you’re finally past the break-even numbers.
Your cash inflow is more than the outflow, and you have a wider choice of financial alternatives if you plan on growing your business further.
Phase Three: Shake-Out
Phase three occurs when you have increasing sales, but they’re not spiking as high as the growth period. This is called the shake-out phase.
With a saturated market and other competitors, you have to do something to stand out and increase your profit margin. Cash outflow begins to exceed inflow, and you may need to invest in a financial solution for working capital.
Phase Four: The Mature Business
Phase four is a mature, solid, dependable business. At maturity, your sales will decrease, and profit will become steady. Overhead is consistent.
It’s time to step up the traditional options and develop a new product or service if you want to get back into the growth-level profits, and a financial solution can help.
Phase Five: The Final Decline
Finally, in phase five, all businesses will decline if they don’t adapt to the current industry’s trends.
To avoid this period, it’s crucial to pay attention when you’re in phases two through four and can still reinvent your business’s edge.
You may also like: 5 Things To Do Before Bringing in Outside Investors
5. Putting it All Together: How to Make the Final Decision
Using the data to drive your decision is essential. Most business owners will look at the easiest way out of their current cash crunch. By putting together your business’s life cycle stage and your goals, you can make the most intelligent financial decision.
When it comes to grants vs. a loan or other alternative, use this formula to make your choice:
Life cycle (credit reliability and finances) + Objectives + Urgency = Financial solution
Data Driven Examples
As an example, if your current life cycle phase is the Shake-Out, it’s time to expand your business. You may be considering opening another storefront or adding a new product, so you need capital.
Your business credit is reliable, but your finances aren’t quite able to accommodate extra expenses. You don’t have an urgent need, so a grant is an excellent choice.
Another example would be a business owner in the growth phase wanting to invest in an amazing sale to grow their inventory. The deal won’t last long, so you need cash fast.
You’ll be able to make a profit out of it quickly, so a short-term loan that has to be paid back within a year is fine with you. Go for it, as long as the fees and interest won’t be more than your profit from the sales.
Ultimately, the final decision is in your hands, but using your data and objectives will help you make the best choice.
Conclusion
Always moving forward is the best way to keep your business relevant and avoid decline. Sometimes, a grant is a fantastic way to meet your long-term goals, but there are many situations where a loan is necessary.
When you need external funds, you have options. Weigh the pros and cons of your choices. For instance, if you invoice your customers, now you know that accelerated invoicing is a much better financial decision than a loan. And Now is a company that offers incredible terms and straightforward approval.
As long as you make an informed choice, rather than an impulsive one, you can relax — knowing you made the right decision for your business needs.
Set up your NowAccount to find out if you qualify for accelerated invoice payments.
*This article is for educational purposes only. NOW currently doesn’t offer grants.
