A Business Loan vs. Grant: Which One?
When looking for solutions, every business owner and entrepreneur knows that there is no one-size-fits-all approach. Each entity is unique, and their approach depends on their industry, size, business model, location, and structure. However, every company needs capital and funding in order to grow. Some firms are able to qualify for a private or federal small business grant. Others, meanwhile, might prefer a Small Business Association loan, especially if they can afford the monthly SBA payment.
Regardless of a company’s size or sector, capital is crucial to its future growth. Yet, for many small enterprises, getting a loan is very difficult. For example, the SBA will not lend you money unless your business makes a minimum of $100,000 per year.
Having said all that, startups and new firms can easily find alternative ways to raise cash, such as a private, state, and/or federal small business grant. Unlike a loan, companies don’t need to pay these funds back. Just as importantly, it is much easier for entrepreneurs to qualify for grants and manage the awarded money more flexibly. Above all else, this type of funding counts as income, which makes it possible for your business to qualify for loans and other types of funding in the future.
Finding a Corporate, State, or Federal Small Business Grant
Governments across the country (and even the world) realize the crucial role that startups and locally-owned companies play. Small firms that have been in business for less than five years create 20% of new jobs across the United States. Meanwhile, every year, almost three million people are left without work because of small business failures.
In light of how important startups are to the economy, there are thousands of federal small business grants that you may qualify for. Furthermore, many state governments and large corporations will support companies that address the community’s needs.
For example, a firm that creates jobs in areas with high unemployment is more likely to receive state or federal funding.
Your company’s revenues and credit score don’t matter when you apply for a grant. Instead, eligible entities need to fill a market gap, whether its local or national. Organizations that focus on advancing technology in certain sectors, as an instance, will find better luck when they apply for a grant.
Moreover, there are plenty of industry-specific funding programs that you may qualify for, such as a federal small business grant that focuses on the agricultural or energy sector.
To clarify, having a fresh idea, demonstrating your qualifications, and presenting a business model that fills crucial industry or market gaps all improve your odds of receiving a grant.
Affording a Loan or an SBA Payment
Half of the small businesses that fail will close their doors because of money-related problems. More specifically, they don’t generate enough revenues to meet expenses or mismanage the incoming and outgoing cashflow schedules.
The lack of capital makes meeting lenders’ income requirements even more difficult, to begin with. Additionally, if a company struggles to fulfill payroll and billing obligations, they certainly can’t afford loan installments.
For example, the average SBA payment on interest, in itself, can be all the way up to 13%.
Just as importantly, unlike with grants, traditional lenders only care about their interest revenues. If your business makes enough earnings and has a strong credit score, a bank or financial institution will lend you money, regardless of how many jobs you create or where you operate.
In other words, this keeps their doors closed in front of startups and new companies. When it comes to LLCs, a recently founded firm may take years to build its credit. If a company owner has good score and applies for a personal loan, they will be held personally liable for any financial problems, which counters the point of creating an LLC.
Meanwhile, not only are the requirements to receive a grant more flexible, but entrepreneurs don’t have to pay these funds back.
The Disadvantages of Grants
As mentioned earlier, there are no one-size-fits-all solutions in the world of business. Grants, in their own respect, have certain flaws and shortcomings.
A federal small business grant, to begin with, requires firms to be aligned with a certain government agency’s goals. As an example, a company in the renewable energy sector doesn’t automatically qualify for funding from the Environmental Protection Agency (EPA).
Instead, their model or key products must also help the EPA meet its carbon reduction targets, create a certain number of jobs, and/or focus on a specific service (such as reducing toxins in rivers). The same applies to state or private corporate-issued grants.
Yet, there are still plenty of funding opportunities out there. This availability may offset the certain restrictions or specifics that are tied to these grant programs. Entrepreneurs can pick between the different state and federal small business grants based on what aligns with their company’s goals and needs the most.
To illustrate, firms that cater to underserved markets (such as minorities or rural populations) will find many ways to raise money. Similarly, there are grants that specifically focus on minority business owners, farmers, and women entrepreneurs.
Applicants from across different sectors and a wide range of business models are eligible for these awards.
Grants, Loans, and Taxes
Unlike a loan, recipients don’t need to pay back grants. However, these funds are taxed as part of their income. For example, assume that one company received an SBA loan while the other was awarded a federal small business grant.
Each of the two firms have $30,000. The latter has to pay an income tax on the grant, but the entity that borrowed money doesn’t. In fact, they can even deduct the interest on the SBA payment from their taxes.
However, this doesn’t make grants any less advantageous than loans. More likely than not, whenever a company receives funding, they are going to spend some or most of it on day-to-day operations. As a result, they may deduct these business expenses from their taxable income.
On average, sole proprietors only pay 13% of their earnings in taxes. This is about the same as the interest on an SBA payment.
In general, without outside funding, business owners will be more reluctant to spend a large amount of money on operations. This is especially true when they are using their savings or personal assets.
After receiving a grant, though, businesses will splash the cash on payroll, marketing, and other needs. Therefore, their 13% tax payment is going to get lower because of all the deductions. Moreover, the savings are larger than when an entrepreneur deducts the interest on their SBA payment.
In short, a borrower’s interest installments may exceed the tax bill of the grant recipient. Equally as important, because these funds count as part of a company’s revenues, recipients become one step closer to qualifying for a business loan and at a lower interest rate later down the road.
Even though some entities might benefit more when they borrow money, this option is certainly not available to all companies, especially startups. Moreover, many of them may not even afford the standard SBA payment on a loan. However, a state or federal small business grant can fill that gap.
More specifically, it provides new firms with the funding that they need to grow their operations and benefit the community.
If you got turned down for a loan or cannot meet the requirements, this may be a blessing in disguise. After all, entrepreneurs may get the money that they need more easily and without having to pay it back.