SBA grant vs. loan: What are the differences?

If you’re looking for funding for your small business, you have a number of options. Two of them are grants and loans. How do SBA grants and SBA loans compare, and which one might be a better fit for you?

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What is an SBA grant?

Grants are financial aid that doesn’t need to be repaid. The Small Business Administration makes grants available to specific types of businesses. For example, businesses related to scientific research and development might be eligible for a federal grant under the Small Business Innovation Research (SBIR) or the Small Business Technology Transfer (STTR) programs. These programs look specifically for small businesses helping to meet federal research and development objectives. They also want small businesses that have a high potential for commercialization.

There’s also the 7(j) Management and Technical Assistance Program within the SBA. This is for small businesses in Regions I-X that provide management and technical assistance to other small businesses.

Finally, the SBA offers grants for community organizations. These organizations must promote entrepreneurship, and they can include veteran-owned companies, service-disabled veteran-owned companies, and Small Business Development Centers.

What is an SBA loan?

Unlike an SBA grant, an SBA loan must be repaid in full, plus interest. These loans are guaranteed by the Small Business Administration. This means that if the borrower cannot repay the loan, then the lender (a bank or credit union) can recover 50-85% of the remaining balance from the SBA. This reduces the risk for lenders, which ultimately means that it’s easier for small business owners to be approved for a loan.

Note: The borrower is still required to pay the full amount due!

What are the differences between an SBA grant and an SBA loan?

While both grant funding and loans help small businesses thrive, there are some important differences to consider.

1. Repayment

As we mentioned earlier, generally, grant funding does not need to be repaid, while a loan does. Furthermore, small businesses must consider the total cost of a loan. Think of these questions:

  • How much do you want to borrow?
  • What’s the interest rate (and could it change over time)?
  • How many years do you plan to repay it over?

This will help you determine the true cost of taking out an SBA loan.

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2. Eligibility

Because grants don’t need to be repaid, qualifying for one can be quite different from qualifying for a loan. A lender, like a bank, looks more at the likelihood that a borrower will pay the money back. During the loan application process, they’re going to look at your credit score and history (both personally and professionally), your finances, any current debt, and other variables.

If you’re applying for a grant, on the other hand, a grantor cares more about how the money will be used. This is why grant funding is limited to certain types of small businesses. Grant funding is much more constrained, and applying for a grant is a lot more competitive.

Loans might be riskier, but they’re also more accessible to small business owners. The loan application process is more available.

3. How the funds are used

You now know that grants are available only to certain types of small businesses. Loans are much more widely available, although certain types of SBA loans might be designated for specific uses.

For example, an SBA 7(a) loan can be applied toward:

  • Starting a new business
  • Expanding a current business
  • Purchasing land or buildings
  • Buying equipment, supplies, furniture, or inventory
  • Working capital

An SBA 504 loan, on the other hand, is more commonly used for construction, financing equipment, and purchasing property specifically.

Should you apply for a grant through the Small Business Administration?

While receiving money that you don’t need to repay certainly sounds nice, bear in mind that most types of small businesses won’t be eligible for an SBA grant. If you are eligible, applying for a grant is a potential way to help your business thrive. For all other small business owners, a loan is going to be a better fit.

What’s the right solution for your small business?

It’s not uncommon for small businesses to need additional funding. This especially became the case during the COVID-19 pandemic. The Economic Injury Disaster Loan (EIDL) program issued loans—which small business owners were required to repay—to help with working capital and other operating expenses. EIDL Advance funds were awarded to existing EIDL applicants and were more like grants, not needing to be repaid. But with these programs no longer running, small business owners are once again looking for ways to get the financial support they need.

Receiving funds that do not need to be repaid is always nice, and for small businesses within specific industries, applying for a grant might be an option for you. Beyond the eligibility factors, consider the repayment terms and what you want to use the money for, to better understand if you might be a good fit for an SBA loan.

SmartBiz® is here to make the whole process easier. We have a trusted online network of lenders and work with your business to match you with the right bank or partner for your needs. Take the next step and apply now* to learn if you pre-qualify for up to $350,000 in just five minutes.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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