It’s important to be fully aware of your options when it comes to seeking financial assistance for your business, projects or educational careers. As business owners or students, your options are somewhat limited to loans, grants (scholarships), and help from relatives. In this article, we will help you weigh those options by comparing one with another. For example Grants vs Loans—especially SBA Loans (which is prevalent amongst American Businesses)— and Grants vs Loans vs Scholarships.
In simple terms, this post will help you determine the best option to fund your business, project or academic pursuit.
What are Grants?
This simply means the financial support given to entrepreneurs or business owners in need— mostly by the philanthropists, top business organizations and sometimes, the government— to establish their ideas and grow their businesses. Therefore, the government takes the responsibility of administering over 1,000 grant awards annually.
The government, however, grants help to fund mostly the agricultural sector, as well as ideas and projects which serves some larger good to the society at large. Moving on, they engage in this program to secure employment opportunities and stimulate the economy.
Types of grants
#1. Pass-through grant funding
This type of grant is from the federal government to the provinces for further distribution to the local government through formula allocations or open competitions. Furthermore, the local government disburse this grant to applicants in their jurisdiction who use the grant to facilitate and grow their businesses.
For example, Federal funds are made available to the state department of health. The state administers the passing through of the fund within its provinces to facilitate projects that improve the quality of human health.
#2. Competitive/Discretionary grant funding
This type of grant involves a process of carefully selecting an applicant’s proposal based on evaluation by a team of reviewers. Therefore, funding is based on the merits of the proposal which means the recipient of this type of grant is not pre-determined. So, if you’re going for this type of grant, you might want to be a lot more creative in writing your proposal.
#3. Non-competitive/Formula grant funding
Formula funding is offered to entrepreneurs or business owners who meet the eligibility requirements of the application process. In other words, the recipient of this grant is pre-determined. Non-competitive grants are issued when:
- Work started under a prior award must be continued
- An emergency or a substantial danger to health or safety mandates an immediate award/funding
#4. Continuation/Renewal grant funding
This is a progressive type of grant which offer the current grantees the opportunity of extending the existing program funding for the following year. In contrast to the other types of grants, the applicant’s proposal should clearly explain the goals and objectives of the business idea and how it is going to benefit society in the long run.
Nevertheless, some renewable program is restricted to the existing grantees only, while some allow for both new applicants and existing grantees.
What are Loans?
This is money you borrow from a person or a financial institution with an agreement to pay back at a stipulated time usually with interest. In most cases, the lender requires collateral to secure the loan and ensure repayment by the borrower.
So, if you want to borrow money, there are several different types of loans to consider. But first, think about what you need the money for. Then compare interest rates, loan amounts and terms before deciding what type of loan is best for you
Types of Loan
It’s important to know the different types of loans and how it works. This would help you to be aware of the conditions and ultimately guide you through the process. The following are the major types of loans out there
#1. Unsecured/Personal Loan
It allows you to borrow a certain amount of money and pay it back with interest at an agreed period. In a personal loan, the risk is minimal because you won’t have to use an asset as collateral to secure it, however, the interest rate does not reduce even as you meet up to the set amount to be paid monthly.
#2. Secured Loan
This type of loan allows you to borrow up to $100,000 while using your house or car äs collateral. This means the lender can possess your property, in the event of a breach of contract from your end. Nevertheless, you’re likely to negotiate an agreement with the lender by contacting them as soon as you realise you’re struggling to meet your payments.
#3. Guarantor Loan
This is a form of unsecured loan where the borrower gets a loan and pays it back at an agreed time. But, unlike the normal unsecured loan, the borrower provides a guarantor who promises to pay back the loan if he’s unable to. A Guarantor is usually someone with a good credit history, who can afford the loan payments.
#4. Car Finance Loan
This is a form of a secured loan that allows you to borrow money to acquire a vehicle. This is usually with repayment terms between three and seven years. An example is the bank of America car loan program In this case, the car serves as collateral. If you don’t pay, the lender will take it back. Also, like every other loan payment term, the lender expects instalment payments every month.
Car loans help make vehicles that often cost tens of thousands of dollars more affordable by breaking up the high cost into monthly payments that work with different borrowers’ budgets.
To further drive home our point, let’s use SBA loans as our case study.
SBA Loans
Small Business Administration (SBA) is a government-owned agency that exists to promote the economy by providing aid to small businesses. These aids can be monetary or counselling services. Hence, Loan SBA is the financial aid given by the SBA agency to individuals trying to start up a small business. Loans guaranteed by SBA ranges from a minimum of $500 to a maximum of $5.000,000.
Types of SBA Loans
Below are various ways in which the U.S government support businesses through the intervention of the Small Business Administration:
#1. SBA disaster loan
As the name implies, this loan is for businesses that had suffered an economic or physical disaster like a Pandemic, fire outbreak and the likes of it. According to the SBA, the business would have to provide evidence of this before a loan could be given.
Furthermore, the loan amount ranges up to $2million with no down payment but requires collateral. Also, it allows the borrower a long repayment term of about 30 years and can only be granted to businesses older than 2-3 years
#2. SBA export loan
This program is for small businesses in America who intend to take their product and services across the country. It supports the elevation of export sales, international transactions and supports the recipients to penetrate the foreign markets.
In contrast to Disaster loans, Export loan amounts go as high as $5million with about 20 years long term. Moreover, the agreement to the loan stipulate that it should be for expansion of the business abroad
#3. SBA 7(a) loan
This program is popular among other SBA loans. According to reviews, it is the best option when real estate is part of a business purchase; also, it is for refinancing existing business debt, expansion, long term working capital and purchase of pieces of equipment
Nonetheless, the maximum loan amount of 7(a) loan is $5million with a long repayment time of 10-25 years.
#4. 504/CDC loan
Like every other SBA loan program, 504 loan promotes the development of specific capital needs of growing businesses. It provides finance for the purchase of fixed assets such as real estate, machinery, lands, buildings, facilities, etc.
Most importantly, the 504 program distributes the loan among; The business owner, the lender and the Certified Development Company (CDC). The borrower contributes 10% of the project cost, the lender (bank) lends 50% and the CDC 40% at their rate and terms.
See Also Small Business Grants in UK 2023 (210+ Grants with Guide)
Grants vs SBA Loans: Differences
- The major difference between a Grants vs Loans are repayment. When comparing grants vs loans, a grant is more like a gift. In order words, it is non-repayable. Whereas a loan requires you to pay back the money you borrowed.
- Grants are non-interest bearing in nature, whereas Loans automatically attracts an interest rate, which varies from loan to loan
- In obtaining a loan, the amount is usually determined by the borrower. For example, a business owner who intends to expand his business knows the exact cost, so he goes ahead to apply for it. But in awarding of grants, the government gets to decide the amount to be that would be given. In as much as some business owners rely more on loans than grants,it is therefore,important to note that a business must be incorporated before it can obtain a loan.
- A loan is given by financial institutions or a private lender to other institutions, individuals and businesses; in contrast to grant, the government are solely responsible in giving to educational institutions, businesses, non-profit organizations etc.
- Grants are awarded for specific purposes only, whereas loans are given for whatever purpose; be it commercial or personal.
- In obtaining an SBA loan, one business is likely to obtain multiple loans from multiple lenders or the same lender. This means that there is no cap on the number of loans a business can take out over time. However, most organizations that give grants set a limit.
- In comparing Grant vs Loan SBA, the availability of funds is a key factor. For example, If you need cash for your business, you can get a loan anytime. Grant on the other hand doesn’t fund immediately. moreover, the chances of getting you a grant to apply for are slim
Grants vs SBA Loans: Similarities
They serve the same purpose of solving our financial needs, and equally, they are awarded based on eligibility and meeting certain requirements.
Grants vs SBA loans vs scholarships
Scholarship means financial support to a student with academic excellence, artistic and athletic ability, to pursue high education level. This is a motivational approach by the government, foundations, corporations; to encourage the student. There are different types of Scholarship which are;
- Need-Based Scholarships– This type of scholarship is based on the financial inability of the student’s family. It requires the student to fill out the FREE APPLICATION FOR FEDERAL STUDENT AID to qualify.
- Merit-Based Scholarships- This is based on the student’s special abilities like athletic, artistic, academic. More so, the student’s record of extracurricular activities and community service.
- Student Specific Scholarships- This involves a situation where the student meets certain specified factors such as; race, religion, family etc…
- Career Specific Scholarships- This is for students who specifically chose to pursue of study. Scholarships are also available through a wide variety of sources, including schools, private businesses, foundations, and nonprofit organizations.
Grants vs SBA Loans vs Scholarships: Differences
- Loans can serve purposes. But the recipients of a scholarship vs grant must maintain those criteria for which they were awarded.
- For instance, a student with academic excellence in college risks termination of the scholarship if he doesn’t maintain the same GPA in the university.
- Scholarships vs grants is the same in that they’re both “gift aid”, but if you don’t use them as intended, you risk losing the aid. A loan on the other hand requires repayment with interest at an agreed time.
- Grants vs SBA Loans is for business owners and entrepreneurs for start-ups and expansion. Scholarship, however, is mostly to students for education-related expenses.
- Scholarships provide opportunities and funding for students from low-income families or communities to pursue higher education, grants, on the other hand, are usually limited.
CONCLUSION
To determine between grants vs SBA loans vs scholarships, you need to consider several factors such as; your timeline, objective and your ability to pay back. This would help you choose the best option for your project.
- SBA Loan Rates: All you need, Updated!!!
- BUSINESS ACQUISITIONS and MERGERS
- SBA LOANS Guide: How to Apply, Eligibility (+ Free easy tips)
- COLLEGE GRANTS AND SCHOLARSHIPS: List of Grants for College Students and Adults.
- SBA GRANT: How to Apply for SBA Grant, Simplified!!! (+Detailed Guide)
FAQ’s On Grants vs Loans
Are Grants Better Than Loans?
The main distinction between a loan and a grant is that a loan must be returned, whereas a grant does not. If you are unable to repay the funding, a grant may be a better choice. Furthermore, loans are made available by financial institutions and individual lenders, whereas grants are made available by various governments and corporations.
Are grants good?
Grants are an excellent method to increase your organization’s visibility and credibility. You may be awarded large sums of money. Once you’ve received one grant, you’re more likely to get another.
Can Grants Be Taken Away?
College students’ federal financial aid may be revoked if they have previously accepted more financial aid than the government has agreed to.
