Especially in these times of economic contraction, having some extra money wouldn’t hurt your business, right?
Either because you need it to do some remodeling, open a new location, increase your inventory, hire more staff, or just to stay afloat with the recurring expenses of your company, receiving a small business loan or a small business grant could be the solution to your sleepless nights.
Although both alternatives would help you get out of financial trouble, they also have their own challenges and difficulties.
In this post, you’ll discover what are small business loans, what are small business grants, and which one is best for your entrepreneurial project.
Small Business Loans: What Are They And How They Work
Business loans are a great alternative to raising capital and can be used for virtually any purpose in your small business. You can use the funds to buy inventory, purchase an asset or a new location, pay your employees, or meet your working capital needs.
But to obtain them, your business must meet certain requirements that banks and financial institutions have. Among them:
- Have at least two years of operation. For younger companies, there are other financial alternatives.
- Have collateral or guarantee. This way, the institutions make sure that they will not lose money.
- A credit score in the range of 620 to 680.
- Provide your social security number. If you don’t have one, look for institutions that allow you to apply only with your ITIN number.
- Financial documents, such as your company’s balance sheet, income statement, and cash flow statement.
You should also consider that traditional lenders can take a long time to approve loans, although there are online financial technology companies (fintech) that tend to be faster.
When it comes to small business loan options, there are several categories:
i. Term loans
They are for a fixed period that could extend up to 25 years, and repayments are generally made monthly or quarterly. You can use them to buy expensive equipment or for working capital.
ii. Short-term loans
They are generally repaid over a period of one to five years and tend to have lower interest rates than credit cards.
iii. Loan refinancing
If you have a lot of high-cost debt, you can take out a low-cost business loan to pay it off. Refinancing could save you hundreds of dollars a month in interest costs.
For businesses that need a relatively small sum. This option is cheaper and better suited to the needs of companies.
v. Unsecured Business Loan
This alternative does not require you to provide collateral.
vi. Commercial Mortgage
If you have an office building or other commercial property, such as a store, you can borrow against the security of this property, depending on the property’s expected operating income.
vii. SBA Loans
Good news: These business loans are partially subsidized by the US government, which helps keep interest rates low. Bad news: It can be very difficult to get approved, as these loans have very strict requirements.
Small business grants: What they are and how to use them
Subsidies or grants are one of the most popular commercial financing alternatives. Many consider them as “free money” because, unlike a loan, you do not have to pay the money back. These financial stimuli can range from a few thousand dollars to several million.
They are awarded by federal agencies (learn more at www.grants.gov), private organizations, and foundations, and are often intended for distressed or minority-owned businesses, such as Latino business owners. There are also those who reward initiatives with the potential to become successful companies.
The requirements for obtaining a small business grant change depending on who gives them. This makes it difficult to be a creditor, as you have to meet many requirements and follow very strict rules to invest the money.
Also, you usually have to compete with many other entrepreneurs to obtain the funds, as they are limited. Besides, the funds can take a long time to be available.
What is best for your business?
Once the advantages and disadvantages of each financial alternative have been broken down, you should analyze which option suits your company best. To help you, consider:
1. How quickly you need the resources
As explained before, small business grants are limited, given on a temporary basis, and it may take time for funds to get to your pocket.
Also, applications have an established deadline, and if you do not comply with it, you are out of the competition. This might not be functional if you need money to cover emergencies or unforeseen events.
Small business loans, on the other hand, can be requested whenever you need them. Of course, you should consider the response time of the institution, although certain fintech have approval periods of less than a week and some can offer the funds only a few days after.
2. How formalized is your business
Consider that to apply for a small business grant you must meet specific criteria, and provide very detailed data and information in the application. Loans are not far behind, although the requirements are more general. For any of the options, having a business plan will be of great help.
In this document, you must describe what products or services you sell, who is your target market, and what makes you different from your competition. You should also detail how much money you need, how you plan to invest the money, and the results you hope to get.
One more tip: provide complete and accurate information. Most likely, an incomplete or inaccurate application will be discarded.
3. The destination of the funds
Grants have rules on how you can spend the money. If you prefer to have the freedom to allocate them to the highest priority, it would be better for you to apply for a loan. They come in various forms and sizes, so shop around for the one that suits you best.
4. If you are part of a minority
This factor has a double trick. On one side, belonging to a minority can reduce your chances of accessing a loan. Did you know that Latino business owners are 22 percent less likely to qualify for a loan, compared to business owners who are not part of this minority?
Seen from another point of view, being a black or Latino business owner, or a female entrepreneur could make you eligible for a small business grant. Note that there are also SBA programs for soldiers, veterans, and female veterans.
5. How much do you need the money?
Grants are generally obtained by competition. In other words, you have to show why your company is the best and deserves to get the money. Also, consider that the amount of paperwork can be overwhelming.
On the other hand, although small business loans are not given by competition, you must also pass the institution’s filters before you can receive the funding.
Analyze and decide!
A capital injection will always be good for your business. While business loans are an alternative for business owners, grants can also help you get the resources you need to grow and take your business to the next level.
Of course, you must consider several aspects before choosing one or the other, since each one has its advantages and limitations. Once you make up your mind, take the appropriate actions to increase your chances of getting a grant or a loan.
Whatever your decision is, once you get the money make sure you use it wisely so that the financial stimuli really help you improve and grow your business.
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My passion is writing and storytelling to inspire people. Professionally, I was able to do it for 10 years as an editor at Entrepreneur Magazine Mexico. Currently, I’m a freelance business journalist and editor working for Entrepreneur, Camino Financial, and Dajafra. I also have an MBT at Collective Academy. My area of expertise is franchising and entrepreneur’s topics. In 2013 and 2014, I collaborate as a writer of “La Nueva Cara de México”, a series of books published by Endeavor Mexico, which analyzes how the high impact Mexican entrepreneurs are changing our country. I’ve also participated as a speaker, judge, and panelist in several entrepreneurial events throughout Mexico.