Grants vs Loans for Businesses: What's Right For You?

Business financing comes with a range of considerations to make, whether that be the goals of the business at the time, the stage of growth the business is in, and the access to funding it might have. Financing can be VC, Angel, family and friend investment, but it can also be grants or loans where you can retain the equity of the business longer.

Understanding the differences between grants and loans is crucial when seeking funding for your business. Each has its own advantages and considerations, and the right choice will ultimately depend on your business's specific needs and unique circumstances.

What is a Grant?

Grants are non-repayable funds provided by governments, non-profit organisations, or private entities to support business growth and development. They are funds designed to assist businesses in specific areas, such as research and development, job creation, or community projects. 

In Europe, one of the most popular grants is the EIC Accelerator, which provides up to £2M to SMEs in addition to coaching and mentoring opportunities. However, there are thousands of other grants available if you know where and when to look.

What is a Loan?

Loans, on the other hand, are sums of money borrowed from financial institutions or lenders that must be repaid over time with interest. While rarer, the government also has popular loan options for businesses, such as the Innovate UK Innovations Loans Future Economy Programme. They are typically used for various business purposes, including expansion, research and development, equipment purchases, or managing cash flow.

There are benefits and considerations for both types of business funding, and what you choose will depend on multiple factors and your eligibility. Want to know what you could be eligible for? Take our 90-second quiz to find out.

Advantages of Grants for Businesses

Grants are a top choice for businesses in need of funding since they enable them to access non-repayable, and often no-equity, funding with lower risk of debt. Let’s look at the benefits in more detail…

1. No repayment required: Grants do not need to be repaid, allowing businesses to use the funds without the burden of debt or repayment pressures.

2. Credibility and validation: Receiving a grant can enhance a business's credibility, as it often signifies recognition from reputable organisations. This can be particularly beneficial when looking for future investors to continue business growth. Learn more about how securing a grant can help prepare for future investment.

3. Financial support for business projects: Grants can provide the necessary funding for projects that might not attract traditional investment, such as innovative research at early development stages, which can often be deemed more risky for investors.

Considerations of Grants for Businesses

While grants present many benefits, there are also some disadvantages and considerations you need to make, such as their competitiveness, eligibility criteria, and complex application process.

1. Highly competitive: The application process for grants is often competitive, with many businesses vying for limited funds. That said, there are billions of pounds up for grabs every year for deserving companies. You just need to make sure you’re applying for the right funding and creating compelling applications that will stand out among the competition.

2. Eligibility criteria: Grants usually have specific eligibility requirements, which can limit the number of businesses that qualify. Yet, this is not unique to grants and securing any type of funding will naturally have eligibility requirements as the funding body will want to make sure it’s a safe investment.

3. Time-consuming application process: Applying for grants can be a lengthy process, requiring detailed proposals and extensive documentation. The application can eat away at weeks of your time, becoming extremely time-consuming and costly for your business, and taking away from your other important duties. As a small business, time is often one of the most valuable assets that you can’t afford to lose.‍
4. Restrictions on fund usage: Grants often come with stipulations on how the funds can be used, limiting flexibility. To maximise your chances of success, it's crucial to understand each grant’s specific requirements and seek expert advice. This ensures you invest your time and effort into applications that align with your business needs.

“Often, when SMEs fail to secure funding, it’s not due to the quality of their product or company, but how they stack up against the competition. Each year, securing funding becomes increasingly challenging, which means crafting a top-tier application is essential.

“You could have the best innovation on the market, but if you fail to articulate it well and don’t tick all the boxes for assessors, you simply won’t secure the funding.”

Adam Hopkins

Grant Matchmaking Senior Funding Consultant at Grantify

Advantages of Loans for Businesses

While grants may often seem more attractive for funding, there are unique benefits of loans that can make them more suitable for some businesses.

1. Flexibility in fund usage: Loans typically offer more flexibility in how the funds can be used, allowing businesses to allocate resources as needed. Examples include day-to-day operations or capital investments, both of which grants typically do not offer.  However, this will depend on a case-by-case basis.

2. Availability: Loans are widely available from various financial institutions and banks, making them accessible to many businesses. The UK government also has loans available to businesses, which come at much lower interest rates than traditional banks, such as Innovate UK’s innovation loan.

3. Potential for larger funding amounts: Depending on creditworthiness and collateral, businesses may secure larger sums through loans compared to grants. Business loans can also come with tax benefits with interest being the most significant tax-deductible expense.

4. Support and networking opportunities: Winning a grant provides not only funding but also valuable support and networking opportunities, connecting recipients with experts, industry leaders, and peer organisations. Grant programmes often include mentorship and collaboration opportunities too, helping recipients refine their projects, expand their reach, and enhance long-term impact.

Considerations of Loans for Businesses

Business loans have many advantages, providing billions of pounds to UK SMEs every year, however, there are some important considerations – one of the most important is that you need to pay back the loan.

1. Repayment obligations: When you take out a business loan, you are required to pay it back, plus interest, which can be a financial strain, especially for small businesses. That said, loans such as the Innovate UK innovation loan offer below-market interest and long repayment terms to reduce this financial burden and make its funding better suited to SMEs.

2. Collateral requirements: Many loans will require collateral, putting business assets at risk if repayment terms are not met. Financial requirements are indicative of responsible lending.

3. Impact on credit score: Failure to meet repayment obligations can negatively affect the business's credit rating, hindering future borrowing opportunities. As long as you meet your repayment requirement, this is not something you need to worry about. Loans are subject to credit checks or detailed financial assessments, which does not always make them suitable for very early-stage startups.

4. Time-consuming application process: Much like grants, the loan application process can be extremely complex and take up lots of your time to complete. Loans also have more financial requirements and, therefore, it may take even longer to complete those elements of the application.

Please note that Grantify cannot provide financial advice. We recommend that you speak to a chartered accountant or your CFO if you seek further guidance.

“One of the advantages that sets Innovate UK’s innovation loan from traditional bank loans is how the repayment term works. Businesses get a below-market rate of 7.4% with long repayment terms of up to 7 years.

“Best of all, while your research and development is still ongoing in the first 3 years, you only need to pay half the interest with zero principal payments. It’s only once you start selling your product that you need to pay the full interest plus the deferred half-interest from the first 3 years and the principal.

"On top of that, there are no set-up fees and no personal guarantees required. Innovate UK takes a ‘different approach to credit analysis’, which focuses on cash flow rather than past performance and collateral.”

Adam Hopkins

Grant Matchmaking Senior Funding Consultant at Grantify

How Do You Make the Right Choice?

When deciding between a grant and a loan, we recommend you consider all the pros and cons outlined above but the decision will ultimately depend on your needs, the funding available to you, and the timescale you need it. Some grants and loans take a month or two to release funds, whereas some can take six months or more!

Every funding option comes with some considerations. Grants provide non-repayable capital, but they often come with restrictions and high competition. Loans offer greater flexibility over how funds are used but require repayment, often with interest. Successful businesses weigh these trade-offs carefully, considering not just the financial implications but also operational freedom and strategic positioning.

Whichever you choose, a well-informed approach to your application will put you in the strongest position for success. The first step? Check your eligibility for funding using our free quiz. If you’re eligible, you can then book a call with one of our funding experts to discuss your project further.