Owning any type of small business requires a sufficient amount of financial capital to cover orders, payroll, and many other expenses. Unfortunately, many business owners are unsure about how they can get enough cash to make ends meet until the profits can pay for the debt and all those operating costs. That’s why some may turn to things such as small business loans or grants to help lighten the burden.
But where do you even begin with all that? What options are out there? AND How do you know which option is best for you and your small business?
Two of the most common solutions involve applying for either loans or grants. Of course, it can be difficult to navigate this process, especially for entrepreneurs who have not had a lot of experience with either. Deciding which is most appropriate for your situation involves developing a thorough understanding of the following guidelines and suggestions.
1. Understand the Difference Between Loans and Grants
Although both of these possible solutions can be a huge source of assistance to struggling small business owners, they are not the same and should be addressed in the appropriate manner. Making the right choice should start with a clear overview of the pros and cons associated with each one.
For starters, the main difference between loans and grants involves the repayment of the money. A loan refers to money that is borrowed and must be paid back to the lender. On the other hand, a grant is basically a financial gift that does not come with any expectation of repayment.
Of course, since grants do not need to be repaid, it stands to reason that they are more difficult to obtain than loans. In many cases, it requires an application and a compelling reason for the money, and a panel of officials must determine whether a grant is appropriate. Loans can be much more attainable, but it is important to know what fees and rates will come along with the repayment process.
2. Know When to Apply for a Loan or Grant
It might be tempting to turn to one of these options whenever there is a shortage of cash to operate a small business. While this could be a compelling solution, it is not always the best choice in every situation. Before taking the first step toward securing funding, it’s a good idea to take a close look at the finances of the business. To ensure that any extra cash will be sufficient to address the current shortfall.
From there, be prepared to continue operating the business after the loan or grant money has dried up. This is a vital component because if there is no solid plan for making a healthy profit, then you can become trapped in a vicious cycle of needing more outside money. This can ultimately lead to long-term financial struggles or even result in going out of business.
Nevertheless, if an injection of capital will put a business back on the path to profitability, it is probably worth considering loans or grants. Before applying, a detailed plan should be made.. outlining where the money will go & how it will be repaid. Make sure everything makes sense and that all of the funding will serve a specific goal.
If you are unsure about whether this path is appropriate given the circumstances, it might be worthwhile to discuss the situation with a financial planner or another trusted expert. They can address concerns or predict unforeseen issues that will put everything in context therefore resulting in a more informed decision.
3. Determine Which Option Is More Appropriate
Since loans and grants are both popular funding alternatives, it goes without saying that both have a place in the economic environment. But the key lies in knowing which one is the better solution for you & your small business.
While a grant might seem like a perfect remedy on the surface, there can be some hidden details that might make it less attractive in the long run. For example, sometimes the entities that provide grants will require small businesses to abide by a range of requirements or restrictions before they agree to provide the funding. In many cases, it’s well worth it to secure the cash necessary to complete a major project or pay employees throughout a tough financial period.
It’s crucial to lay out all of these factors early on in the process to ensure that there are no surprises that could emerge later on. Make sure that any paperwork or docs make sense and that there’s nothing that will be challenging to abide by regarding the terms. If everything looks good, there is usually no better option than applying for a grant and receiving funding without any requirement to pay the money back.
The Upside to Remember About a Loan..
When loans are involved, there is usually a lot more freedom regarding where the money can be spent. Of course, this also comes with the major component of negotiating terms for repaying the cash received through the deal. Upon reviewing any interest & fees that will come along with the loan, the clear benefit is that it can be used for just about any purpose you need it to.
If you want to use it for an expansion, to purchase inventory, or to hire new staff members, this will be the perfect opportunity to invest in the company! Which can set the stage for greater growth down the road in your business journey. Ideally, the seed money will pay off in increased sales, which will in turn make it much easier to pay off the loan. Without all the looming concerns associated with going even further in debt.
4. Focus on the Benefits of Loans Specifically
Even if applying for a grant sounds like an ideal scenario, it’s never a good idea to go into it blindly. Be sure to consider everything that can come along with obtaining a small business loan rather than immediately seeking a grant.
For starters, it is much easier to obtain a loan. While credit scores and other variables can cause certain rates to be out of reach, there are a number of organizations and professionals that can find the right funding opportunity for you.
Check out local banks, national lending institutions, private loan organizations, and even independent investors who might be willing to lend some money directly to the business. It might take some time to create the perfect pitch and take care of some minor details that stand in the way of the perfect loan, but these possible pitfalls are easy to avoid. And any roadblocks that might arise in the process can typically be cleared with just some planning and advice from a trusted source.
If the funding is pivotal for a particular use, a business owner is sure to appreciate the opportunities that can come along with seeking a loan. Those of you who are concerned about making your own choices will likely gravitate toward loans because it puts you in the driver’s seat. Therefore allowing you some important freedoms that grants simply do not.
In the end, the only things standing in the way of you obtaining a business loan is your credit score & proof that you will be able to meet the repayment terms.
5. Focus on the Benefits of Business Grants
The major benefit associated with applying for a grant is obviously that the recipient does not need to pay the money back at any point. But there are some other important details to consider when determining whether a grant is the right option for your small business.
Although there are not as many opportunities here as when loans are involved, it’s possible that grants will be able to offer some flexibility & freedom. Which any entrepreneur probably needs to fund the fledgling company’s many expenses and costs.
The peace of mind that comes along with knowing that there will not be any monthly payments or debt incurred by receiving a grant is enough to make this option seem very compelling. There are no hidden fees or responsibilities with the grant after the time comes to review all of the applicable restrictions which is a huge plus.
Another positive is that there are no financial risks involved. When obtaining a loan, there is always the possibility that future economic hardships could prevent the timely repayment of the cash. This would have detrimental impacts on the borrower’s credit score and could lead to repossessions or other types of asset losses. When all of the qualifications of a grant are met, there is nothing left to do but put the money to good use & reap the benefits of the added funding.
6. Know the Best Places to Find Your Money
After considering all of the pros and cons associated with both grants and loans, it is the right time to start shopping around for the best options. This step can look different depending on things such as the type of small business and location, but there are a few overarching rules of the road that can lead you in the right direction.
There are a few broad categories for grants, so the first step toward securing such funding lies in recognizing which sounds like the best fit. Federal grants can be made available to businesses in a number of different ways: including those set aside for rural businesses, companies in the tech sector & small businesses as defined by the Small Business Association.
While the SBA generally does not distribute grants directly to business owners, it is affiliated with the PRIME Program. Which has provided a significant amount of grant funding to so-called “micro-entrepreneurs”.
There might even be an opportunity to cash in on some of the grants that were established during the COVID-19 pandemic. Though it’s important to review all of the restrictions and requirements that are in place to qualify.
More Useful tips to Mention
State and local grants are also available, which might be easier for small businesses to navigate. Making connections in a community can often open up doors that could pay off with a great amount of funding without any of the repayment strings attached. It is also worth checking with a Chamber of Commerce to see if there are any grants available that set money aside to help people who are starting a new business.
Finally, corporate grants are also frequently available within a number of leading business sectors. Which can provide just the right amount of cash for businesses struggling to expand or move into new disciplines.
When it comes to finding a favorable loan, there might be more opportunities, but it’s crucial to think about all of the important details before signing any paperwork. For starters, it’s a good idea for business owners to think about their credit scores & make moves to improve them.
That obviously will ensure the lowest possible rate and open up the list of lenders to the widest number of options possible. In addition to visiting local banks and credit unions, it might also be a good idea to network in the same business community. Receiving some input & advice regarding where to look for lending that can offer the best possible rates and terms. It may seem a bit overwhelming but once you find the right option for you & your business, it may be your ticket to take things to the next level!
Stephanie is the Marketing Director at Talkroute and has been featured in Forbes, Inc, and Entrepreneur as a leading authority on business and telecommunications.
Stephanie is also the chief editor and contributing author for the Talkroute blog helping more than 100k entrepreneurs to start, run, and grow their businesses.