April 10, 2020 Coronavirus en_US What's the difference between small business loans and grants? Which is right for your business? This article explains all. https://quickbooks.intuit.com/cas/dam/IMAGE/A9BRUNhO9/Difference-between-small-business-loan-grant.jpg https://quickbooks.intuit.com/r/coronavirus/difference-between-loans-grants/ What’s the difference between small business loans and grants?
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What’s the difference between small business loans and grants?

By Danielle Higley April 10, 2020

The biggest difference between a grant and a loan is repayment. Generally, you do not have to pay back a grant, but you do have to repay a loan.

Many entities can apply for either or both. It’s common to associate grants with nonprofits and loans with businesses. But businesses can receive grants too, from organizations like the Small Business Administration (SBA) and others.

Typically, lenders approve loans with an understanding that the borrower will repay the amount borrowed, plus interest. The amount of interest the borrower pays is based on the type of loan they take out, their credit history, or the duration of the loan. A generous lender may lessen the burden of repayment with low interest rates and long-term repayment plans.

Because grants don’t typically have to be repaid, you might assume the burden on the receiver is low. But getting a grant takes work, and most grant providers also have rules around how recipients can use grant funds. If they don’t spend grants appropriately, grantees may not get another from the same organization.

That brings up another difference: numbers. One business might receive multiple loans from multiple lenders. They might also be able to get multiple loans from the same lender. But some organizations that give grants have a one-time cap. By contrast, it’s rare for lenders to put a cap on the number of loans a business can take out over time.

The most common reasons to get a small business loan

There are many reasons to get a loan for personal and professional use. But let’s assume the loan is related to a small business. The most common reasons to get a loan, based on the types of loans available, include

  • To fund the start of a new business.
  • To get temporary financial support when the business is struggling or growing.
  • To get a constant stream of available funds to support the ebb and flow of business transactions.
  • To purchase an expensive piece of equipment.
  • To purchase or improve real estate, such as a storefront or warehouse.
  • To get temporary disaster-assistance funding.
  • To fund employee payroll costs.

The most common reasons to obtain a small business grant

You might say the most common reason to obtain a grant is to get access to “free” money (i.e., money you don’t have to repay). But often, there’s a more important underlying reason. A small business might use a grant to fund a large research project. Or an entrepreneur might use a grant to fund a new business venture.

Types of small business loans

Installment loans: Most small businesses can take out these loans. Borrowers receive these loans in one lump sum and repay them in fixed installments.

Short-term loans: Typically, client-facing businesses use these loans when they need cash fast. Borrowers receive these loans in one lump sum and repay them in fixed installments.

Business lines of credit: Most small businesses can take out these loans. Instead of one lump sum, borrowers receive a credit line from which the business can draw funds at any time.

Equipment loans: Borrowers can use these loans to purchase expensive equipment, machinery, or tools.

Commercial real estate loans: Borrowers can use these loans to purchase or improve commercial real estate. Typically, business owners with strong personal credit and revenue take out these loans.

SBA loans: The SBA facilitates these loans through approved lenders who can issue them for most business purposes. Some SBA loans, like Economic Injury Disaster Loans (EIDL), are only available in certain circumstances.

Invoice financing: Typically, business-facing businesses with unpaid invoices take out these loans. The idea is that the borrower can use their unpaid invoices as leverage to access business funds.

Personal loans for business:Typically, entrepreneurs looking to start a business venture take out these loans. Rather than approving a loan based on business eligibility, lenders approve loans based on the borrower’s eligibility.

Microloans: Typically, startups and entrepreneurs take out these loans. Lenders approve microloans in installments of $50,000 or less.

Crowdfunding and P2P loans: Typically, startups and entrepreneurs take out these loans. But any business might be eligible for such a loan. Investors or backers source these funds, so it’s important to make a note of what part is a gift and what part is a loan.

Types of small business grants

Applying for a grant might make you feel like you’re back in college, applying for a scholarship. And like scholarships, there are a lot of grants out there if you know where to look. As a small business owner, there’s a good chance the federal government will provide any grant you’re eligible for. The Small Business Administration has a variety of grants related to small businesses. Here are two examples:

  • Boots to Business (B2B) grants. This grant program is geared toward entrepreneurs, who are also active duty service members (including National Guard and Reserve) or veterans, and their spouses. Recipients receive entrepreneurial education and support for five years.
  • The Federal and State Technology (FAST) Partnership Program. Businesses or other entities focussed on research and technology may be awarded these grants. Participants must be part of the Small Business Innovation Research (SBIR) program or the Small Business Technology Transfer (STTR) program. These programs encourage small businesses to engage in federal research, research and development, and innovation research.

Beyond the SBA, other small business grants include categorical grants, research grants, corporate grants, and demographic-specific grants.

Categorical grants: Typically, the federal government awards categorical grants. These are used for specific purposes, and small businesses may apply.

Research grants: This is a broad term for any research-related grant awarded as part of a discretionary grant or block grant. Commonly, the SBIR or the STTR programs award research grants. But the Economic Development Administration (EDA) may also award research grants.

Corporate small business grants: The government isn’t the only entity willing to give funds to small businesses. Some large private or corporate companies may award grants to other businesses in their industry.

Demographic-specific small business grants: These grants assist specific members of the community, like women entrepreneurs or entrepreneurs of color. Nonprofits or other businesses interested in supporting a particular demographic sometimes award these grants.

The benefit of small business loans

One of the biggest benefits of taking out a small business loan, as opposed to going after a grant, is availability. If you need cash for your small business, you can get a loan anytime, likely from your local business lender.

But speed isn’t the only variable to keep in mind, particularly if a loan doesn’t benefit the borrower. It’s important to pay attention to the fine print in any loan, especially in relation to interest and the duration of the loan. Because loans have to be paid back and can affect your credit score, it’s important to be sure you can repay any loan you take out.

The benefit of small business grants

Small business owners can receive grants during their startup phase, during expansion, and for research and development. And as we know, the biggest upside is that grants, unlike loans, typically don’t need to be repaid. What’s more, they aren’t likely to affect your credit score.

There are some downsides, however. To start, grants, unlike loans, don’t fund immediately. And you won’t get every grant to apply for. If you need money today, a grant isn’t going to help you unless it’s already been awarded to you. Often, grants also come with restrictions from the provider. Breaking those restrictions may result in consequences or penalties.

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Danielle Higley is a copywriter for TSheets by QuickBooks, a time tracking and scheduling solution. She’s been a contributor to MSN.com, FiveThirtyEight, and a variety of HR and business blogs where she can put her affinity for long-form storytelling to best use. Read more