Small Business Grants vs. Small Business Funding
Grants and funding are two ways small businesses can get the funds they need. These options might work for you, whether your business is just starting out or established and growing.
The main difference between grants and funding is that grants don’t need to be paid back. This results in stiff competition and an involved application process for grants. Funding, which can come from a traditional loan or an alternative method, is more accessible to some businesses.
Whether you end up pursuing a grant, funding, or both, it’s essential to understand how each option works and how to get it.
What Are Small Business Grants?
Small business grants are money given to businesses to help them achieve their goals. The federal government, regional governments, and various organizations provide small business grants.
Unlike small business loans, business grants don’t need to be paid back. However, to secure a grant, you’ll need to prove that you’ll correctly utilize the funds.
There’s usually a thorough application process that involves several steps. Some companies use contests to determine who they’ll award a grant to.
One unexpected benefit of receiving a grant is publicity. An organization choosing you as a recipient shows that your business is going places. It can result in increased attention from the public, including potential customers and investors. You can also mention your grant in marketing materials.
To win a grant, you’ll need to demonstrate that your business will meet a unique need. You’ll also need to prove that you have a viable business plan.
Grant recipients are often asked to show their progress and how they’re using the money. This process can involve meeting with grant administrators and providing financial reports.
The process of researching and applying for a grant can be intimidating. Luckily, there are resources to help you along the way.
Types of Small Business Grants Available
Grants for small businesses come from a variety of sources, including government agencies, non-profit organizations, and corporations like FedEx.
Some grants focus on business owners who are underserved by traditional funding options, such as women, veterans, and minorities.
The federal government typically awards grants to businesses in sectors such as non-profit, education, and scientific research institutions.
There are various online resources to help you research federal small business grants. Grants.gov is a thorough database of options that various local government and federal agencies offer.
The Small Business Administration (SBA) is one of the best-known government agencies that provide grants. Does your business conduct scientific research and development? You may qualify for one of the SBA’s two science-specific programs. There’s also an option for businesses involved in global exports.
State and Regional
State and regional government agencies also provide grants for small businesses. For example, there are six Economic Development Administration (EDA) offices that cover different parts of the country. Each EDA offers grants for companies in its region.
State government grants often focus on businesses that directly benefit the state’s residents. Examples include businesses involved in educational institutions, healthcare, and the arts.
To start looking for grant opportunities, check your state’s government website. You can also search on Grants.gov using your state as the keyword.
Women own around 40 percent of all businesses in the U.S. However, women are less likely to seek additional business funding, and are less likely to be approved for a loan. Grants aimed at women-owned small businesses can help.
Grants for women come from the government, non-profits, and private companies. Examples include the Amber Grant, which awards $2,000 to a women-owned business every month, and an additional $25,000 each year. The Eileen Fisher Women-Owned Business Grant gives a total of $100,000 to up to ten businesses annually.
Starting a small business can be tough for veterans who are dealing with the transition back to civilian life. There are grants available that can make the process easier.
A Veterans Business Outreach Center can help you research and apply for grants. They also provide financial education and other services. Use the SBA’s search feature to find your local center.
Minority business owners often deal with unique challenges when starting a business. There are a variety of grants designed to help overcome these challenges.
The Minority Business Development Agency works with various organizations to give out an average of $300,000 annually. The agency lists new grants on its site when they become available. They tend to focus on certain goals, such as using technology in minority-owned enterprises.
The U.S. Department of Health and Human Services operates an Office of Minority Health (OMH). OMH offers many different grants for businesses that work to improve health in minority communities. Minorities also own many of these businesses.
What Is Small Business Funding?
Small business funding options include conventional bank loans, SBA loans, and alternative methods.
Typically, this funding is paid back, but it’s not always in the form of a one-time payment. With some options, you can pay your investors back through a percentage of profits or with goods or services.
There are some factors you want to consider when looking for funding. These factors include eligibility requirements, such as annual revenue and credit score. The funding terms, such as interest rates and timeframes, are also important.
Types of Small Business Funding Available
You might think of small business funding as limited to conventional bank loans. While these small business loans are one popular choice, they aren’t the only business funding option you can pursue.
The SBA and other organizations offer funding that’s a better fit for some businesses than a bank loan. There are also alternative methods, including online funding, crowdfunding, and merchant cash advances.
Banks offer conventional funding for small businesses. If you receive a conventional loan, you’ll usually need to begin paying it back on a monthly basis with interest. Some banks offer quarterly or annual payments.
Banks have strict criteria for lending, which means a conventional loan can be hard to secure. Requirements often include annual revenue of $300,000, a credit score of 680 or higher, and four years in business.
SBA Loans and Funding
In addition to grants, the Small Business Association provides loans. SBA funding may be accessible for businesses that don’t qualify for traditional lenders’ financing solutions.
There are flexible options, with loan amounts ranging from $5,000 to $5 million. Another perk of SBA loans is that they’re guaranteed by the federal government.
Some SBA requirements are similar to those of traditional bank loans, such as good credit and cash flow. This means that there will only be some eligible businesses, especially if you have a bad credit score.
The application process is also lengthy and usually takes at least 30 days.
Alternative Funding Methods
Crowdfunding is one alternative funding method that has become massively popular over the past few years.
Crowdfunding sites like Kickstarter, let people contribute small amounts of money so you can get your business up and running. In return, crowdfunders usually receive your product or service. You might choose to offer perks, like a shoutout on your website or extra product samples, for higher contributions.
A merchant cash advance (MCA) is another popular funding option. With an MCA, a provider gives you a cash advance in return for a percentage of future credit card sales.
MCAs work better for some industries than others. They are likely to be beneficial for restaurants, retail stores, salons, and auto shops. If your business doesn’t accept credit cards, you won’t qualify for a merchant cash advance because you’ll need credit card payments for remittance.
Peer-to-peer lending is an option where a third-party lender acts as an intermediary between a borrower and an investor. The investor could be an individual or a bank. This option usually includes fast funding and an easy application process; the downside is high interest rates.
Fora Financial offers small business funding with a simple application process, requiring only a few bank statements. You can get approved in 24 hours and receive an amount ranging from $5,000 to $500,000.
Which Is Better For Your Growing Business?
There are a few factors to consider when you decide whether to pursue a grant program or funding option.
Your business may not be one that grants typically cater to. Or, you might not feel that the lengthy grant application process is a good use of your time. In those cases, funding could be a better option.
If you’re starting with a lower business or personal credit score, you might find that you’re not eligible for traditional funding. The same could be true if your annual revenue is low. A grant designed for brand-new businesses could be the kickstart you need. Looking into alternative funding methods would also be a wise choice.
Don’t rule out the possibility that your business can benefit from both options. Some business owners use funding to supplement a grant.
A lack of capital is one of the most common reasons that businesses fail. Having access to a grant or alternative funding could be the difference between closing your doors and thriving.
Frequently Asked Questions
What is a small business grant?
A small business grant is money that the government or another organization provides to a business. Grants don’t need to be repaid, and there are grants available for specific businesses, including those owned by veterans, women, and minorities.
What are small business funding solutions?
Funding for businesses comes from a variety of places. Conventional bank loans are one option. The SBA also offers small business loans. For some businesses, alternative methods such as online or peer-to-peer lending are a better choice.
Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.