When seeking financial assistance, you may come across two common options—grants and loans. While both provide funding, they work in very different ways. Knowing the differences can assist you in selecting the best option based on what you need.
According to the U.S. Small Business Administration (SBA), 80% of small businesses use loans to fund their operations, while only 5% receive grants. This data shows that grants are harder to get, but they have a big advantage—you don’t have to pay them back. Loans, on the other hand, are easier to access, but they come with repayment terms and interest, which can add financial pressure over time.
Since funding decisions can have a big impact, it’s important to understand how loans and grants are different. If you need money for a business, choosing the right option can help you manage your finances better.
What Exactly Is a Grant?
A grant is money given by the government, businesses, or organizations to help individuals, businesses, or nonprofits. It is a gift, meaning you don’t have to pay it back as long as you follow the grant’s rules. Grants are usually awarded based on need, merit, or specific project goals.
Key Features of Grants:
- No need to pay back a business grant unless the recipient fails to follow its terms.
- Often provided for a specific purpose, such as sponsoring research or community projects.
- Highly competitive, as many people apply, but only a few are approved.
Loan Explained
A loan is money borrowed from a lender, such as a bank or financial organization, and has to be repaid over time. Loans typically carry interest, which means you will repay more than you received. Some loans may also require collateral, like property or assets, as security.
Key Features of Loans:
- Must be repaid, including the original loan amount and interest.
- Personal expenses, commercial demands, and emergencies are some of the uses.
- Approval is based on credit history, as lenders check your credit score and financial background before lending money.
How Are Loans and Grants Different?
Loans and grants both provide financial support, but they work in very different ways. Knowing the key differences between a grant and a loan can help you choose the right option for your needs.
Repayment Requirements
Grants do not need to be repaid unless the recipient fails to follow the grant’s terms. On the other hand, loans must be repaid with interest, which raises the total amount owed over time.
Eligibility Criteria
Grants are often awarded based on factors such as financial need, business type, or the purpose of the project. Loans, on the other hand, are accepted according to the borrower’s creditworthiness, income, and ability to repay.
Application Process
Applying for a grant usually requires submitting detailed proposals, financial documents, and justifications for how the funds will be used. Loan applications, however, focus on credit scores, income verification, and repayment plans.
Funding Amounts and Flexibility
Grants typically provide limited funding with strict guidelines on how the money can be used. Loans, in contrast, offer higher amounts and greater flexibility in spending.
Risk Level
Grants come with no financial risk since they do not require repayment and have no impact on
credit scores. Loans, however, carry a higher risk because missed payments can negatively affect credit ratings and financial stability.
Availability
Grants are limited and highly competitive, with strict eligibility requirements. Loans, on the other hand, are widely available, making them a more viable financial choice for both individuals and enterprises.
Pros and Cons of Grants and Loans
Grants and loans both offer financial assistance, but each has its own advantages and drawbacks. Knowing the pros and cons of each can help you make a better decision based on your financial situation.
Grants
Pros:
- No repayment required – You don’t have to pay back the money.
- No financial risk – Grants won’t affect your credit score or put personal assets at risk.
- Encourages growth – Supports businesses, education, and community projects without adding debt.
Cons:
- Highly competitive – Many people apply, but only a few receive grants.
- Limited funding – Grants often provide small amounts with strict usage guidelines.
- Long application process – Requires extensive plans, financial papers, and approval, which can take some time.
Loans
Pros:
- Widely available – Easier to access through banks, credit unions, and online lenders.
- Flexible use – Can be used for personal, business, or emergency expenses.
- Larger funding amounts – Borrowers can access more money than what most grants offer.
Cons:
- Loans must be repaid – Interest adds to the total cost over time.
- Financial risk – Missed payments might harm your credit score and cause debt.
- Credit-based approval – Eligibility depends on your credit history and ability to repay.
How to Apply for a Grant and a Loan
Before applying for a grant or loan, think about your financial needs. Do you require immediate access to funds, or are you searching for long-term financing? Your response will help you determine which choice is best.
Applying for a Grant
Grant applications can take a while and are extremely competitive. Follow these steps to improve your chances:
Research available grants
Look for grants that match your needs and check the application deadlines and requirements.
Write a strong proposal
Many grants need an extensive application that describes your organization’s objective and how you plan to use the cash. Make your proposition clear and persuasive.
Plan for reporting
If you obtain a grant, you may be required to produce regular updates on how the money is spent. Set up a system to keep track of expenses, timelines, and deliverables.
Applying for a Loan
Loan applications focus on financial stability. Here’s what you need to do:
Find a trustworthy lender
Compare lenders and their terms to find one that offers reasonable repayment options.
Gather financial documents
Most lenders require credit reports, tax returns, cash flow statements, and a business plan. If you have limited credit history, some lenders still offer loans, but often at higher interest rates.
Be ready for an interview
Some lenders may require a meeting to discuss loan terms, repayment plans, and possible collateral. Be prepared to answer questions about your financial situation.
Best Small Business Grants and Loans
Top Small Business Grants
If you’re looking for government grants, start with Grants.gov. This website lists federal grant opportunities from over 20 agencies, including the U.S. Department of Justice and the U.S. Department of Health and Human Services. These agencies distribute over $500 billion in grants each year, but they often require research or specific project results in return.
Besides government grants, many nonprofits, private companies, and local governments offer grants. These often focus on women- and minority-owned businesses or companies in specific locations.
Best Small Business Loans
Many small businesses rely on loans for financing. The U.S. Small Business Administration (SBA) lending program is a popular choice. Here are the main SBA loan types:
- 7(a) Loans – The most common SBA loan. These loans are typically utilized for purposes such as working capital, real estate purchases, debt refinancing, or equipment purchases. Maximum loan: $5 million.
- 504 Loans – Helps businesses finance long-term projects like buying buildings, land, or machinery. Maximum loan: $5 million.
- Microloans – For small businesses needing a small funding boost. Can be used for inventory, furniture, or equipment, but not for real estate or paying existing debt. Maximum loan: $50,000 (average is $13,000).
To find a suitable lender, businesses can use the SBA’s Lender Match tool, private banks, or fintech lenders. Always check the loan terms before signing an agreement.
Combining Grants and Loans for More Flexibility
Using both grants and loans can give your business short-term cash and long-term stability. However, it’s important to review the terms before applying. Some grants may limit your ability to take out loans, and certain loans could conflict with grant conditions.
Also, consider how quickly you need funding. Grants take longer to approve, sometimes months or even years, while loans can be approved in days. To stay prepared, apply for grants early while also considering a loan for immediate financial needs.