If you were to choose between a business loan and a grant, which would you go for?

Most business owners are likely to say grant because it is mostly seen as free money. However, deciding on choosing between a loan and a grant goes beyond choosing the one where you don’t have to pay back. And as a company that gives out business loans and has won grants, we understand what it means to get both kinds of funding and the peculiarity of each.

Due to the competitiveness of business grants, it may not be the best option for a business that urgently needs cash to take care of key business expenses. On the other hand, a loan may also not be the best option for a business just starting. So, there are key factors to consider before deciding on the best one for your business.

In this article, we’ll examine the pros and cons of business loans and grants, the differences between them, and what to consider to know the best for your business. Let’s dig in.

What is a Business Loan?

A business loan is a sum given to a business owner by an individual lender, institution, bank, or the government to be repaid with interest within a specified period. There are different reasons why small businesses get loans, such as to buy equipment, buy more products, expand the business offerings, etc.

Different types of loans include microloans, equipment funding, term loans, business line of credit, etc. To get a business loan, one must fulfill key criteria as set by the lender, such as having a business registration document, consistent cash flow, a solid financial statement, and, in some cases a collateral.

Pros of a business loan

• A loan is relatively easy to get if you meet the lender’s requirements.

• You can apply for any amount of loan you need, as there’s no limit, as in the case of grants.

• The application process can be straightforward, compared to that of grants.

• Loans are easily processed and received by the recipients.

Apply for a collateral-free loan with us and get the money in days.

Cons of a business loan

• Loans need to be paid back with interest and within a specified period.

• Some loans require you to submit collateral, and in a situation when one is unable to repay the loan, the collateral can be seized by the lender.

• Taking a loan from a loan shark can land one in bigger debt due to the exorbitant charges and interest rates.

You should read: 7 Questions to Ask Before Applying for a Business Loan

What is a Business Grant?

On the other hand, a business grant is a specific amount of money given to a business for a specific purpose, and it is not to be repaid. Grants can be given by individuals, organizations, the government, etc, and for various purposes and to different sets of people.

For example, a grant can be targeted specifically towards female entrepreneurs, while some are for student entrepreneurs. Grants can also be given to be used for specific things in one’s business, such as to stock up products, to buy business equipment, and more.

You should read: How to Successfully Get a Business Grant in Nigeria

Pros of business grants

• Grants are given for free and don’t have to be paid back.

• Grants do not come with any risk to your reputation or credit score.

• Winning a business grant can boost your reputation as a business owner.

Cons of business grants

• Grants are competitive, making them difficult to access than loans

• The application process for grants can be long and time-consuming.

• There are stringent criteria and requirements to fulfil to get a grant.

• There are conditions to follow for how you can use a business grant.

• For some grants, the receiver must send regular updates to the grant giver on the progress of his/her business and how the money is being used.

Related: 6 Surefire Ways to Get Investors to Fund Your Business: Lessons from Shark Tank

Differences between Loans and Grants

Here are some key differences between business loans and grants.

1a. A loan is to be repaid to the lender with interest

1b. Grants do not have to be repaid, it is often seen as free money.

2a. A loan may require collateral

2b. Grants do not require collateral

3a. You can use a loan to fund anything in your business

3b. Some grant requirements may state that you use the grant money for specific things in your business

4a. Loans are given based on business strength

4b. Grants are very competitive and are awarded based on the giver’s requirements

5a. There are different types of small business loans, such as microloans, lines of credit, equipment loans, etc.

5b. Various kinds of business grants include research grants, capital grants, operating grants, etc.

Factors to Consider When Choosing Between a Business Loan and a Grant

Deciding between getting a business loan or a grant can be tricky, especially if you are seeking external funding for the first time. Here are the key factors to consider to choosing the best option for your business.

1. What you need the money for

If you need money to fund a groundbreaking idea or solve a societal issue, you can go for a grant. However, if the money is to get business equipment, get products, and fund other business expenses, a loan may be your best option in this case.

Some grant givers also specify what the grant is to be used for. So, if your need doesn’t align with why they are giving the money, you may not be able to get the grant.

2. The urgency of the need

How fast you need the money is another factor to consider. Grants usually take a longer time to process as givers need to determine those who are qualified and examine other key factors before awarding the grants. So, if you need the money fast, a loan is your best option, as most business loans can be processed in days, ensuring you get the funding you need to grow.

Apply for a collateral-free loan with us and get the money in days.

3. Your eligibility

For most loans, the key requirement is based on how financially healthy your business is. Other key requirements include your ability to repay the loan, Identification documents, and a certificate of business registration.

On the other hand, grants may be restricted to some locations, industries, and even gender. Also, some grants come with certain requirements, such as using the money for specific things and writing why you deserve the money.

4. The application process

The application process for loans and grants is different. Loans can be easy to apply for if you have solid business finances and good traction in your business. The application process for grants can be quite tedious, as you need to prove why you are worthy of the grant, while ensuring that your application stands out from others to get a chance to win.

Best Way to Get Funding for a Small Business

The best fund to get for your small business is your customers’ money. The ability to convince your target audience to trust you with their money and buy from you is the first thing that will convince potential grant givers and loan lenders that your business deserves to be funded. So, while you are still seeking external funding, ensure that you are generating internal revenue through sales.

At Triift Africa, we provide the funding, resources, and community for you to grow a successful business. Loved this article? Kindly give as many claps as possible to show your appreciation.