Securing funds is amongst the most significant aspects an enterprise has to go through, whether at the nascent stage of commencing or planning expansion. Indeed, the correct financial solution can adequately grease the wheel for the growth of your own business.
Peloton’s success, for example, can be attributed in part to its ability to leverage external funding to fuel its growth and innovation. As the company grew, Peloton secured debt financing to support its expansion plans and working capital needs.
The two most common options people consider are business loans and grants, but these facilities don’t serve the same purpose. This guide will break down the types of business loans and grants to help you make informed finance decisions.
Type of Loan/Grant | Description |
---|---|
Term Loans | A loan offering a lump sum upfront with a fixed repayment schedule, ideal for large investments like equipment or real estate. |
SBA (Small Business Administration) Loans | Government-backed loans offering lower interest rates and longer repayment terms, covering working capital, real estate, and equipment. |
Lines of Credit | A flexible credit line allowing businesses to borrow what they need and pay interest only on the used amount. |
Equipment Financing | Loans specifically for purchasing business equipment, with the equipment acting as collateral. |
Merchant Cash Advance (MCA) | An advance on future credit card sales, repaid by deducting a percentage of sales. |
Government Grants | Grants offered by government agencies to promote innovation and community development. |
Private Grants | Grants provided by companies or foundations for businesses aligning with their mission, typically for environmental or community projects. |
Industry-specific Grants | Grants targeted at specific industries like agriculture or technology to foster innovation and sustainability. |
Business Loans: Flexible and Structured Financing Options
Business loans are a structured means of access to finance. Businesses must return these loans with interest over some time. Most typical types of loans that businesses can raise include the following:
Term Loans
A term loan offers a single amount upfront and allows a fixed repayment schedule, generally 1 to 10 years. It’s ideal for significant investments, like equipment or real estate.
- Pros: Predictable payments, flexible terms, fixed or variable interest.
- Cons: Can be collateral, strict eligibility criteria.
SBA Loans
The Small Business Administration offers government-backed loans that are easier to qualify for than traditional loans. Popular options, including the ever-popular SBA 7(a), cover working capital, real estate, and equipment.
- Pros: Lower interest rates and longer repayment terms.
- Cons: Long approval process, tight documentation.
Lines of Credit
Business lines of credit offer flexibility because the business can borrow precisely what it needs and boasts of only paying interest on the utilized amount.
- Pros: Very flexible, pay for only what you use.
- Cons: It can be very costly if handled poorly and may require collateral.
Equipment Financing
Equipment financing is a type of loan that is used to purchase equipment for the business. The equipment usually serves as collateral in this kind of loan.
- Pros: It frequently has quick approval and is collateralized by the equipment.
- Cons: Only suitable for purchasing equipment.
Merchant Cash Advance (MCA)
An MCA involves a single advance, which is repayable by deducting a percentage of future credit sales.
- Pros: Fast approvals, with scalable payments aligned with sales.
- Cons: High fees, which may lead to cash flow stress.
Business Grants: Non-Repayable Capital Finance
Unlike loans, grants offer free capital without including any need for repayment. However, their eligibility criteria are generally strict, and the competitive process is very long.
Government Grants
Government agencies provide a wide range of grants, such as Small Business Innovation Research grants, which foster innovation and community development.
- Pros: Non-repayable, vast area of coverage.
- Cons: Very competitive, project-based, lengthy approval.
Private Grants
Companies and foundations grant private grants to companies whose business falls into their mission, usually related to the environment or community.
- Pros: Free funding, possible networking.
- Cons: Limited to specific projects or sectors.
Industry-Specific Grants
Specific industries, such as agriculture or technology, offer grants to innovate and encourage sustainability within their respective sectors.
- Pros: Industry-specific support is provided uniquely, and no repayment is required.
- Cons: Eligibility is restricted, and the application process is complicated.
Which Option is Right for My Business?
A loan or a grant? It depends on the following factors.
- Time sensitivity: The availability of money through loans is always faster, whereas the grants may take longer to disburse.
- Ability to return the money: The loans carry the burden of return, while grants do not.
- Eligibility: Your good credit score will facilitate getting loans, whereas grants are biased towards innovation and social importance.
Conclusion
Understanding the different types of business loans and grants can help you make informed financial decisions. Loans offer flexibility but require repayment, while grants provide free capital but often have stricter application processes.
Consider your business’s needs, eligibility, and overall financial health to make the best choice when conducting financial forecasting. If loans and grants aren’t the right fit, bootstrapping can be a viable option. Hostifi is a great example of growing without relying on external funding, strategically managing its finances to achieve $1M ARR (Annual Recurring Revenue).
Join Ownerpreneur today to learn more about how Hostifi achieved this success and get expert advice on financing your business.