When you start a new business, there are several different ways to secure initial funding. In addition to using your own savings or finding investors, two common ways are using small business grants and small business loans.
The two terms are not interchangeable. In fact, the programs are entirely different from one another, with each having different long-term considerations for your business. Here are the key differences between a small business grant and a small business loan.
What is a Small Business Grant?
Small business grants are awarded by federal, state, and local governments with the goal of funding projects which provide public services and help grow the economy. In order to qualify for small business grants, your company must meet some basic qualifications, including:
- Being a for-profit business of any structure
- Being independently owned and operated
- Being physically operated in the United States (or its territories)
- Must not be nationally dominant in its field
- Must meet U.S. Small Business Administration size standards
In order to get a grant, businesses must apply before the deadline with an outline of how they plan on satisfying the grant requirements. Grants are awarded on a competitive basis: The applications will be reviewed and awarded to the most qualified small business.
If your small company wins the grant, you will not be required to pay back the money if the work order is satisfied. Federal grant opportunities are listed on the grants.gov website, while state- and local-level opportunities will be published on those agencies websites, respectively.
What is a Small Business Loan?
While a small business grant is tied directly to an identified need from the government, a Small Business Loan is designed to help companies get financing for their operations. There are several different Small Business Loan types, depending on your needs.
Some loans are provided through programs of the U.S. Small Business Administration and are only available to qualifying small businesses. The most common loan is the 7(a) loan, which can be used for many different needs. Uses for the 7(a) loan include improving business real estate and buildings, buying company equipment or furnishings, refinancing current business debt, or even a change in ownership. Other SBA programs include long term 504 loans and microloans, both administered through community partnerships.
Financial institutions may also offer Small Business Loans which are not administered or guaranteed by the U.S. Small Business Administration. Because these loans are offered directly through the institution, they may have different lending requirements, such as business size, cash flow projections and credit history.
Like any loan, you will need approval to take out the money from the financial institution on an agreement to pay it back over a fixed period of time with interest. To prepare to apply for a Small Business Loan, you should create a business plan, outline how much you are seeking and how you plan on using the money, along with financial projections for your company and any collateral you may be putting up for the loan.
Not sure if a loan is right for your small business? Talking to our Business Services Team can help you get clarity on the best way to grow. From savings and checking to business and commercial loans, we make decisions on the Central Coast for Central Coast business owners. Contact us today to get started on making your enterprise the best it can be.