Starting a business often requires external funding. However, deciding on whether to get this funding via a grant or a business loan can be tricky. While both may provide you with some capital, they differ in ways that could potentially leave you in disarray if not carefully planned for.
Failing to understand the differences between the two could result in financial strain, missed opportunities, and unmanageable debt. The major thing that sets these two apart is that grants are not to be repaid, ad by definition, loans must be repaid.
In this blog post, we’ll break down the differences between grants and loans, highlight their pros and cons, and advise you on which option best suits your needs.
Table of Contents
What is a Grant?
A grant is a sum of money awarded to an individual, business, or organization for a specific purpose without having to repay it. Usually, grants are handed out by government agencies, non-profit organizations (NPOs), or foundations to support things like education, research, community development, and even starting up a business.
In the context of business, these funds are approved to support small or upcoming businesses and foster economic growth in underserved communities. To qualify for a grant, applicants need to meet specific conditions, such as proving that they need financial assistance or that the purpose of the grant strongly aligns with the organization’s mission.
That being said, to qualify for a business grant, you’d have to prove to the grantor that your business idea demonstrates an impact, such as creating job opportunities or advancing the economy. The grant application process can be extremely difficult because of how competitive it is.
The overall advantage remains that unlike loans, grants are not repayable. This is good news for people or organizations who want to achieve their goals without taking on debt.
What is a Loan?
Conversely, a loan is money borrowed to be repaid, usually with interest. You can get a loan from banks, money lenders, and even friends or family members. The borrower (you) has to agree to the terms and conditions set by the lender (whoever gave you the money) in order to receive the loan. Items found in most terms and conditions of a loan include:
- Principal: How much you borrowed.
- Interest: Cost of borrowing the money.
- Tenure: How long you have to repay the loan.
- Collateral: An asset you offer to the lender in exchange to secure the loan.
Loans are categorized based on their purpose. For example, personal loans are typically used for home renovations or grocery shopping. A business loan, on the other hand, is granted to entrepreneurs to either start up, maintain, or grow their business.
Unlike grants, business loans have to be repaid within a set period, which leads us to another way loans can be categorized: short-term, medium-term, and long-term. Short-term loans are typically paid within twelve months; an example of a short-term loan is GTBank’s Quick Credit.
Medium-term loans usually have a repayment period of 1–5 years, and long-term loan repayments go up as high as 30 years. In the end, the total sum repaid will almost always exceed the original sum borrowed due to the interest charge.
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Key Differences Between Grants and Loans
To further solidify your knowledge of grants and loans, we went over 4 major differences between these forms of financial assistance:
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Repayment
Business grants do not have to be repaid, making them a more attractive option for business owners who want to avoid debt. Business loans, on the other hand, have to be repaid with interest, and failure to meet up with repayment can affect your business standing.
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Eligibility and application process
Business grants have strict eligibility criteria, usually targeted at a specific demographic like low-income business owners. Plus, any grant application process is very competitive, as a large number of people will be going after limited funds.
Applicants also have to provide detailed information on what they will do with the funds, so the grantor can confirm that your goals align with their mission. Loans are much easier to qualify for, provided you can repay the loan.
Loans are not as competitive, but your approval is heavily dependent on your credit score and whether you can repay the debt or not.
Read also: How to Write a Loan Application Letter in Nigeria
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Financial impact
As long as you don’t have to pay back a grant, it has no impact on your credit score. They are ideal for people who want to gain financial assistance without potentially affecting their current standing.
On the contrary, loans have a direct impact on your credit score. Repaying your debt on time can improve your score, while late repayments limit your ability to borrow in the future.
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Flexibility
Grants come with a condition on how the money should be spent. For example, a business grant has to be spent on a pre-approved business idea. Failing to follow these guidelines could mean returning these funds.
Loans, on the other hand, offer more flexibility. Once approved, you have the liberty to spend the money however you like. All that matters is that you can repay the money when it is due.
Read also: How to Get Loans Without a Salary Account or Collateral for Your Startup
Pros and Cons of Grants
Pros
- No Repayment: The biggest advantage of grants is that you do not have to pay back the money. This makes it easy.
- Great for Long-Term Projects: Other than starting a business, grants are normally used for long-term projects like education or community outreach.
Cons
- Highly Competitive: There’s no guarantee you’ll get one, and grant applications can be very lengthy.
- Not flexible: Many grants specify how the money should be spent, and you may be required to report on how the allocated funds are being used.
Read also: Top 10 Best Loan Apps in Nigeria
Pros and Cons of Loans
Pros
- Immediate funding: loans provide quick access to significant amounts of money, making them ideal for projects that require instant funding.
- Easier to Qualify: In most cases, it’s easier to obtain a loan, especially if you have a good credit score and reliable source of income.
Cons
- Interest Element: 99% of the time you pay back a sum greater than what you borrowed.
- Risk of Debt: Poor financial choices can cause your debt to grow at a geometric rate and negatively impact your financial standing.
Grant Vs Loans: Which is Better?
The answer is, it depends. If you plan to dive into a long-term project that aligns with a specific purpose or cause, then a grant would be better. Grants are especially helpful for people who do not have the capacity to repay large sums of money.
Startups and nonprofits stand to benefit a lot from grants since it allows them to fund their goals without worrying about any financial obligations.
In contrast, loans are better for when you need immediate funds and have a clear plan on how to repay the money. Entrepreneurs who have more immediate needs, like recruitment processes, should consider taking a loan instead. If you have a reliable income source, a loan offers you flexibility that grants cannot match.
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Conclusion
To make informed financial decisions, it’s important you understand the difference between a loan and a grant. While grants have the advantage of free funding, your chances of securing one are very slim.
Even though loans provide immediate and flexible financial support, they can spell trouble if not managed properly. In the end, your goal is to achieve an objective, and your ability to determine whether a grant or loan meets your needs will set you on the path of financial bliss.
Edited by Priscilla Ajayi.
About Author
- Rosemary Inok is an experienced ghostwriter with over two years in the field, producing more than 100 pieces of content. She particularly enjoys writing flash fiction, bringing a passion for storytelling to every project.
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