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Many start-ups today have need for financial support hence a loan or a grant, whether as an individual or as a group looking to build or expand a business, it is pertinent to know the various funding options available to you. Even though grants and loans achieve the same aim they are fundamentally different.
So, what are these differences, and why is it essential for start-ups to understand them?
This is the main difference between a grant and a loan. While grants are essentially non-repayable, loans are repayable. Grants could be seen as a gift while loans are borrowed. When loans are taken, they are usually paid back with some profits for a given period. Failure to repay a loan could lead to the lender taking charge of the borrower’s asset that he/she has set down as collateral or security. This is never the case for grants as there is no need to repay the money.
Essentially, grants are given by individuals, trusts, Government, non-profitable organizations, established businesses and so on. As for loans, they are usually awarded by banks or financial institutions, businesses, individual lenders and sometimes the Government.
The paper works for grants may be less cumbersome as there is nothing and no reason to hold onto beneficiaries after they have gotten the money. While the paper works for loans are carefully prepared and well detailed to ensure that no end is left loosed. Sometimes the details of a loan agreement could require the services of a legal counsel for proper understanding due to the sensitivity of the matter.
Grants tend to be fewer in terms of availability, they are also more difficult to obtain, this is because there are not many people or organizations who give grants when compared to loans. Sometimes when a grant is announced, the ratio of people who applied for it compared to those who get to benefit is quite marginal. Whilst this is the case for grants, loans are all over the place, in fact, it has become a regular business for individuals today. This makes loans easier to obtain and most start-ups rely on loans over grants to fund their business.
Considering how much you can access as a start-up, there is a high chance that you would be limited by grants but have more options with loans. Since grants are free, the amount made available is usually limited and may not be enough for the applicants, while loans will give you a wider range if your repayment commitment are met. Lastly, a business must have been incorporated before it can apply for a loan.