Grants vs Loans: Understanding Non-Dilutive Funding Options
Is there really a big difference between loans and grants? Short answer: Yes. Long answer: Let us explain!
Last week, we talked about grants vs investors on the Pocketed blog, because it’s important to know the different types of Canadian funding your business can receive. Another type of funding your business should know about is loans!
A loan is borrowed money that you have to pay back with added interest. Loans aren’t categorized in the same way that grants are so you can usually use a loan for whatever you see fit.
Although both loans and grants are forms are non-dilutive funding (unlike investors), they still have some major differences. So let’s get into it!
Do I have to repay grants and loans?
The biggest difference between grants and loans is that grants are reimbursed funding and loans are borrowed funding.
When you secure a grant, you will have to pay for the project or hire upfront, but at the end of the process, you will be reimbursed by the grant provider for the grant amount.
For a loan, you are given the money upfront, but there is an agreement that the funds will be repaid with an added interest. So you’ll really be paying back more than you actually received, whereas grant funding is more like free money!
What’s more complicated?
Loans and grants are complicated each in their own way. Loans are complicated because you have to stick to a repayment schedule and your interest continues to pile up. But grants are more complicated because each grant has different eligibility requirements.
You’ve probably heard the term personal loan, these are typically used for home renovations, purchasing a home or vehicle, debt consolidation, etc. Then there are small business loans which are what many company owners might be looking at. There aren’t as many requirements for loans as there are for grants. Loans usually consider credit score, annual revenue, business plan, and collateral.
For a grant, each one is different. Some grants are specific to hiring, research & development, training, etc. and they each have different documentation and reporting that will be required. Some grants are specific to certain demographics, for example, some grants will cover a higher percentage of costs for hiring a student from an underrepresented group.
So, the answer to this, is that it’s hard to say which one is more complicated because they are both complex depending on type, eligibility, and knowledge about loans/grants.
But a big thing to remember is that there is far less risk involved when you choose to seek grant funding over a loan.
What the heck is collateral and why do I need it?
Grants will almost never require collateral, but with loans, it is very common that the loan provider requests some form of collateral as protection for their money.
Use this scenario for example: a bank loans you $100,000 to buy property for your new business. Unfortunately, your business goes under and you aren’t able to pay back the bank. They’ve now lost out on $100,000, which is a risk they can’t take. So instead, they request collateral (usually in the form of a vehicle, property, etc.) that the loan provider will seize in the case that you don’t meet your loan payments.
Are you a grant and loan expert yet?
Because this is only a short blog post, we can’t tell you every single pro and con to grants and loans. They are very different forms of funding so it’s important you know what you’re getting into before choosing one. And just because you choose one now, doesn’t mean you can’t take advantage of the other type later.
There are plenty of ways you can finance your business — like grants, loans, investors, donations, etc. But you are the master of your own kingdom, choose the funding that works best for you!
And in the case you like the sound of free money — Create your free Pocketed account to access all the grants of your dreams!