5 Reasons why a Loan could be a better option for your good business over a Grant
When people think about good businesses, it’s not uncommon to think about grant funding as a source of early-stage finance to get the business off the ground. But what isn’t talked about enough is how tough it is to get grant funding and the impact it can have on the long-term sustainability of your business.
Loans on the other hand have a bad reputation stemmed from “loan sharks” prying on vulnerable people and setting ridiculous return rates. But not all loan providers are evil and there are elements of this source of funding that could work much better for getting your business to a point of sustainability.
Here are five reasons you might not have taken into consideration about loan funding that could make all the different to your business.
Prove the Sustainability of your Model
The key difference between a loan and a grant is the outcome the funder is looking for. With a grant, funders are looking for you to have a social or environmental impact. There is normally not much focus on financial sustainability. On the other hand, a loan provider is looking at helping you kickstart your traded activity and the focus is how you will use that capital to test that the model works to sustain the company.
This shift in focus makes all the difference at the early stages of the business when your focus should be on figuring out how to sustain the business to stand any chance of setting something up that works long term.
Avoid the Funding Trap
In line with the first point, what so many good businesses find themselves in after the first few years of getting their business off the ground is what we in the support sector have coined “the Funding Trap”. Entrepreneurs with good intentions focus on getting a grant funding to start the business activity but aren’t prepared for the amount of time and effort it takes to acquire funding as well as the administration needed to report to the funders.
What commonly happens is that all their energy is focused on the activity of the funded aspect of the business (normally required in the shape of a “project” by funders), and all the time and energy they had thought they would have to focus on the traded aspect of the business gets eaten up.
The impact of that is that once the funding has come to an end, they have no other income to sustain the business and are reliant on getting additional funding to continue the business. And so the cycle goes round and round - caught in this trap.
Competing for Resources
No matter how many funding lists you come across, grants are a limited resource and therefore the process to accessing them is a competitive one. Some grants are looser when it comes to application processes, but these are usually the small ones that offer just hundreds or a couple of thousands of pounds to a good business.
Loans aren’t unlimited or without competition, but where by in a grant funding process your application is competing directly against other applications around a deadline, to access a loan your application is reviewed in it’s own right and if your proposition is a good one, you will be awarded a loan.
Flexibility is Key at the Start
If you’re within the first few years of starting a business you will be evolving your business offering a lot based on all the feedback you’re getting. You want you finances to be flexible enough to accommodate your growth, not stifle it. Some funding will ask questions or pull funding if you aren’t delivering exactly what you’d put in your bid.
Loans on the other hand use your projections as a starting point to understand your plans but as long as you’re growing the business, they won’t be worried about if you’re spending what you said you would on stationary or venue hire.
Your Needs are at the Core
If you’ve already engaged with grant funding you will no doubt have experienced being “creative” with your application, focusing on and shaping your bid alongside the funders values and criteria just so you’re in with a chance to access the funding. What is likely happening is you’re shaping your business around a funders needs, not your own.
A loan is much more flexible and will normally allow you to use the capital on what ever you need to get you up and running - focused 100% on your needs.
There is no right funding and wrong funding but there are lots of considerations you want to be taking on board at the early stages, so you’re saving yourself time, energy and money in the long run. Get in touch if you’d like to soundboard your idea with someone to get some external input on what funding path might work best for your business.
Looking for funding to get your good business off the ground?
I’ve teamed up with an angle investor to support purpose-led businesses access £20,000 to start their business.
This is part of the Good Business Roadmap course which you can find more details about here.