Business loans and grants are a good way to infuse a little bit of cash into your business to help you get the ball rolling. The average person may not have access to enough liquidity to bankroll their great business ideas.

Loans and grants ensure that entrepreneurship doesn’t have to only be for people who are already wealthy. That’s not to say, however, that they are the perfect solution for everyone. It’s only through proper and thorough understanding that you can start using grants and business loans to your advantage.

In this article, we take a look at both sides of the equation to help you understand when and how a business loan might be the right solution for the intricate finances of your business.

Business Loans

Business loans are set up through a lender to provide funds for your business. That money is then repaid over a predetermined period of time, usually with interest. While the structure of your loan can vary pretty radically based on the terms, there are several common forms of loans that you will encounter nearly everywhere you look.

This includes:

• Fixed-term loans: Fixed-term loans are much like the arrangement described above. You borrow a specific amount of money and pay it back over a predetermined amount of time. These types of loans are similar to your home or car loan in how they are structured.
• Lines of credit: Lines of credit have more flexible borrowing terms. If you have a credit card or HELOC (home equity line of credit) then you know the score. Lines of credit do still have limits, but they replenish over time as you make payments. With lines of credit, interest rates may be higher, but you only pay interest on the funds that you use.
• SBA loans: SBA loans are government-backed and usually have more agreeable terms for the borrower.

Lenders will take many criteria into account before issuing you a loan. This will include everything from your credit score to your projected revenue and financial statements. They may also take collateral into consideration. If your revenue stream dries up, do you have other assets that will still allow you to pay back your loan?

It’s a difficult and often stressful process, but there are many good things about it to consider. Business loans provide you with access to capital that you probably wouldn’t have otherwise been able to attain. They allow you to build up your credit, and make big investments in your business with the potential to pay off in the long run.

The downside, of course, is that they are expensive. Interest adds up over time, and unless the loan funds help you generate a revenue increase that is higher than the interest rate you are paying, it probably won’t be worth it.

Business Grants

Business grants are cash infusions that you don’t have to pay back. They are usually provided by government agencies or non-profit organizations. Typically, they exist to further a specific goal. For example, there might be a grant out there to help you pay for environmentally friendly appliances.

While there are many sources of business grants, it is a good idea to start locally and branch out. There may be organizations in your community that offer funds to business owners. These local opportunities are usually less competitive.

Grant eligibility can vary widely based on the terms of the grant. Usually, the grant will have very specific target criteria. They might want to help minority-owned businesses. Companies that avoid using BLANK, or make a point of only doing WHATEVER.

In other words, the grant will have a goal, and your job during the application process is to make sure you can prove your ability to meet said goal.

Generally, you will also need to be able to prove that you will use the funds that they give you for the specific purposes stated in the grant— though some may be looser with their terms than others.

The nice thing about grants is that you don’t have to pay anything. Ever. Obviously, that is always going to be more appealing than taking on another interest payment. However, the scope of grants can be very limiting, and actually getting them is a competitive process. Unless your business happens to cater to the specific cause of the opportunities you encounter, you probably won’t be able to get one.

Which is Better?

It’s not exactly that one opportunity is better than another. Obviously, the ability to avoid repayments is “better,” for the financial health of your business. However, the accessibility of loans ensures that almost every business owner with a clean credit history will be able to get them. Here is the rule of thumb for choosing between loans and grants.

• Loans: Loans are for general financing. If you want to remodel in your building, expand product development, or buy a new piece of equipment, this will be the route you take.
• Grants: Grants are goal specific. If you want a grant, you will need to be compliant with the terms of the opportunity being offered.

During the life of your business, you may take advantage of both opportunities. The most important thing is how you use them. Cash infusions are a great way to level the playing field and take advantage of opportunities that otherwise wouldn’t have been available to you.

As with any loan, however, it’s important to use good sense. Speak with the financial professionals in your life before taking on any cash infusion. They will be able to walk you through the pros and cons of the arrangement and help you better understand your business expenses, and what it will take to pay back whatever is owed.