The terms ‘grant’ and ‘loan’ are often used interchangeably to describe a form of financial aid. The two types of financing are actually different.
Here’s a quick look at how grants and loans differ to help you identify the best option for your needs.
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What is a loan?
A loan is a sum of money given to an individual or business with the expectation that it will be repaid over time with interest.
The funds can be used for whatever purpose the borrower sees fit, such as starting or expanding a business, purchasing equipment or repaying other debts.
There are two main types of loan:
A secured loan involves you putting up collateral property or assets such as a car or a house. If you fail to repay the loan within the agreed time, the creditor can take possession of these assets.
Examples of secured loans include homeowner loans, bridging loans and logbook loans.
An unsecured loan does not require any collateral. As a result, the value of the loan is usually lower.
What is a grant?
A grant is a financial award given to a person, business or organisation which is intended for a specific purpose and that doesn’t have to be paid back.
Grants are usually awarded by the government, charitable organisations, trusts and educational organisations. The aim of a grant is to promote some public good.
For example, the government may give a business a grant on the condition that it provides jobs in an area where there’s high unemployment.
What’s the difference between a loan and a grant?
This is the main difference between loans and grants. If you take out a loan, you must repay the amount borrowed, whereas a grant does not have to be repaid.
Grants usually come from the government and sometimes from charitable organisations, trusts, and educational organisations.
For example, at the moment, the UK government is providing financial support in the form of grants to people and businesses affected by coronavirus. Among the grants on offer are the Restart grant and the SEISS grant.
Loans, on the other hand, can be obtained from a broader range of sources, such as private parties or individuals, businesses, banks and financial institutions, and the government.
The amount of funding available through a grant is typically less than that available through a loan, owing to the fact that you do not have to repay it. Loan amounts can vary, whereas grant amounts are almost always fixed.
Application and eligibility
A grant is free money for you or your business, but it can be difficult to obtain because you must meet certain strict terms and conditions. The application process can be lengthy, and access can be difficult.
Obtaining a loan, on the other hand, is much simpler and requires far less formality and has fewer conditions.
Loan vs grant: which is right for you?
If you are looking for funding, asking yourself these questions can help you determine whether a grant or a loan is best for your situation.
1. What do I need the funds for?
Does your goal or project meet the aims or criteria of a grant that is available? If your answer is no, you may need to apply for a loan.
2. How soon do I need the funds?
The grant application process can be lengthy and complicated. If you need the money right away, a loan may be the best option. However, if you are willing to invest the necessary time, effort, and research, a grant may be worth the trouble.
3. Can I repay the money?
This goes without saying, but if your ability to repay the loan is in doubt, a grant may be a better fit for your circumstances.
Loans and grants can both provide you with the funds you need to achieve your goals. There are fundamental differences between the two. One choice isn’t inherently superior to the other. Do your research to see which kind of funding is most suitable for your needs.
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