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Grant vs Loan: What’s the Best Option for Financing Your Business in Canada?

By Arthur Dubois | Published on 19 Sep 2023

Rustic background with dice letters symbolizes funding concept

    As a Canadian entrepreneur seeking funding, you’d love to find money to make your business grow. However, sometimes the choices seem more complicated than expected.

    While grants often appear as the more attractive option, they come with their own set of challenges. For instance, they may become unpredictable or come with a complex application process. Meanwhile, loans, though requiring repayment, offer more immediate access to capital. 

    What matches the financial reality for most Canadian small and medium-sized businesses? A balanced blend of both grants and loans. This article will quickly guide you through the advantages and pitfalls of both funding sources. 

    Choosing the Right Financing Option in Canada

    Choosing the right financing option makes a huge difference for the long-term success of your business. Different businesses have unique financial needs, so always evaluate your specific requirements before making a decision.

    When considering grants or loans, you must assess various factors, such as the purpose of financing and the amount needed. Further, the timeframe for repayment can impact your business’s financial health. It helps to have a clear understanding of the advantages and disadvantages of each option to make the best choice.

    For example, you don’t have to repay business grants. These subsidies typically come from government agencies, non-profit organizations or private foundations to support specific industries, projects or initiatives. They offer a valuable source of funding for businesses for research and development, expansion into new markets or sustainable practices.

    On the other hand, business loans provide a different set of advantages. Unlike grants, loans require repayment with interest while providing businesses with access to larger amounts of capital. You can apply loans to purchasing equipment, financing inventory or covering operational expenses. Additionally, they can help businesses establish a credit history, building capacity for future financing needs.

    When deciding between grants and loans, consider the eligibility criteria. Grants often have specific requirements that limit applicants to certain industries or regions. Loans, on the other hand, typically require a solid credit history and collateral. Understanding these factors will help you determine which option aligns best with your business’s goals and financial situation.

    Additionally, consider the application process. Applying for grants usually involves submitting a detailed proposal outlining the purpose of funding, expected outcomes and a budget. This process can eat up valuable time as you compete with other businesses for limited grant opportunities. In contrast, applying for a loan involves providing financial statements, business plans and other supporting documents. The loan application process may seem more straightforward, but it requires careful financial planning and a solid repayment strategy.

    Of course, businesses can tap into grants and loans at the same time. Some businesses may secure a grant for a portion of their financing needs then borrow funds for access to additional capital. This hybrid approach can provide businesses with a more comprehensive funding solution.

    An Overview of Business Grants in Canada

    Finding the right financial support for your business in Canada can become a complex but rewarding endeavour. With a range of options from federal to private grants, each type offers unique benefits and comes with its own set of restrictions. 

    Federal Grants

    At the federal level, various grant programs aim to bolster Canadian businesses and innovation. Programs like the Industrial Research Assistance Program (IRAP) specifically target small and medium-sized businesses to develop and commercialize technologies. While these highly competitive grants offer significant funding, they prioritize industries related to national interests, such as technology and manufacturing.

    Additionally, various federal ministries and branches offer hundreds of options for grants. For instance, Community Futures disperses money from Innovation, Science and Economic Development Canada via 267 regional offices across the country. Each office lines up loans, tools, training and events for entrepreneurs starting, expanding or selling businesses. 

    For more options, tap into the Business Benefit Finder to find the right program for you.

    Provincial Grants

    Provincial governments offer grants tailored to local needs and industries. For instance, the Alberta Export Expansion Program connects small and medium-sized with up to $25,000 to meet international buyers. It subsidies travel expenses and registration fees for trade shows or events to create new client bases. Likewise, Alberta has various other business grants available. Next door, British Columbia has a broad range of business grants as well.

    These and other grants often target region-specific sectors like agriculture or fisheries and typically require a business to operate within the province to qualify.

    Follow these links to ongoing programs in each province and territory:

    Municipal Grants

    Municipal grants often target community improvement or urban development. Cities like Vancouver offer Green Demolition Grants to foster sustainable building practices while replacing older homes. These grants are usually smaller in scale but tend to have less stringent eligibility criteria. Contact your municipality or regional tourism or economic development office to see what may suit you.

    Private Grants

    Private grants from corporations or foundations, such as the Sustainable Development Technology Canada. It finds, funds and fosters Canadian companies that develop, demonstrate and commercialize new clean technologies. These types of grants usually focus on a mission, like fulfilling corporate social responsibility objectives. Expect to encounter highly specific criteria and outcomes.

    Conditions and Eligibility Criteria

    While grants offer a variety of opportunities, they often come with strings attached. Some grants are age-restricted, targeting young entrepreneurs or startups. Many also restrict eligibility based on ownership. For example, businesses with a significant percentage of foreign ownership may not qualify for certain programs. Pay attention to these conditions to effectively navigate the grant landscape in Canada without investing unnecessary time.

    Pros and Cons of Business Grants in Canada

    Understanding the distinct advantages and disadvantages of business grants empowers informed financing decisions for your Canadian business. The table below outlines key pros and cons you should consider when contemplating a business grant as your financing route.

    ProsCons
    No Repayment Required: Grants are essentially free money, meaning you don’t have to pay it back.Application Process: Applying for grants takes valuable time, often requiring extensive documentation.
    Boosts Credibility: Receiving a grant can enhance your business’s reputation with the right publicity.Competitive:  You compete for limited funding against many applicants, lowering your odds for success.
    Targeted Funding: Grants often focus on specific industries, purposes, or demographics, which can align well with your business needs.Restrictions: Grants usually come with conditions like how to spend the money or specific timelines.
    Stable Ownership: Unlike equity financing, grants do not require you to give up ownership stakes.Uncertain Availability: Grants depend on available funding and can disappear or change at any time based on the funder’s priorities.
    Support and Resources: Many grants come with additional non-monetary support, like mentorship or access to networks.Eligibility Constraints: Certain grants get limited to specific demographics, such as young entrepreneurs, and often exclude foreign shareholders.

    An Overview of Business Loans in Canada

    Securing a loan can serve as a direct route to much-needed capital for your Canadian business. Unlike grants, loans require repayment, often with added interest. However, they usually offer quicker access to funds and fewer eligibility restrictions. Let’s delve into the various types of business loans available in Canada.

    Traditional Bank Loans

    Banks such as TD Canada Trust and RBC extend business loans to businesses of all sizes. They offer a range of loan products, like working capital loans and equipment financing. While these loans often feature lower interest rates, they typically require strong financial records and collateral as security.

    Government-Backed Loans

    Government programs, like the Canada Small Business Financing Program, support businesses that might not qualify for traditional bank loans. Meanwhile, Business Development Canada specializes in business loans and advisory services. Although easier to secure due to partial government guarantees, they still come with the obligation of interest charges.

    Private Lenders

    Within the sphere of private lending, options include venture debt firms and online loan providers. Further, you can seek out more specialized forms like revenue-based financing and installment loans. Revenue-based loans require businesses to pay a percentage of their revenue until the loan gets settled. Meanwhile, installment loans involve fixed, regular payments. While these loans offer greater flexibility, they usually come with higher interest rates.

    With lenders like OnDeck Canada, you can fill in an application in 10 minutes and secure funds within 24 hours. Meanwhile, Merchant Growth offers the same timeline, with loans of $5,000 to $800,000 without collateral.

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    Business Credit Cards

    Business credit cards offer another flexible financing option. They’re particularly useful for covering smaller, routine expenses and can quickly boost your business’s purchasing power. Some cards offer rewards or cash-back programs that can benefit your business. However, they often come with high-interest rates, so relying too heavily on them can quickly lead to debt accumulation. You could always pursue a merchant cash advance with a clear plan to settle up again quickly.

    Microloans

    Smaller funding needs can often be met through microloans. Organizations like Futurpreneur Canada specialize in providing smaller loans geared towards entrepreneurs between 18 and 39. These loans are generally easier to secure and may offer additional benefits like mentorship.

    Key Considerations

    Choosing a loan comes with its set of responsibilities, including timely repayments and interest rates eroding your bottom line. Failure to meet these terms can damage your credit score and future borrowing capabilities. Additionally, beware that loans often require collateral or personal guarantees.

    Pro and Cons of Business Loans in Canada

    As we continue to compare grants and loans for Canadian businesses, you’ll learn the distinct benefits and drawbacks of each. 

    ProsCons
    Quick Access to Funds: Loans generally provide access to capital within days or weeks, useful for urgent needs or taking advantage of opportunities.Interest Payments: Unlike grants, you must pay interest, adding to your business’s financial burden.
    Flexible Terms: Many lenders offer various repayment terms, creating a schedule that aligns with your business’s cash flow.Credit Score Risk: Failure to repay the loan on time can harm your business credit score, complicating future borrowing.
    Variety of Options: From bank loans to government-backed options and private lenders, multiple avenues exist for securing a business loan.Collateral Requirements: Many loans need collateral or personal guarantees, risking assets if you default on repayment.
    Less Restrictive Eligibility: Loans often have fewer eligibility restrictions compared to grants.Financial Reporting: Some loans require periodic financial reporting and even audited financial statements, adding to administrative work and operating costs.
    Builds Credit History: Timely repayment can boost your business credit score, easing future financing.Cost of Borrowing: Additional fees and charges may make the loan more costly than anticipated.

    Grant vs Loan: Which One Better Suits Your Business?

    After exploring the various facets of grants and loans, the question remains: Which financing option better suits your business? The answer depends on a range of factors. These include your personal credit score, your industry, your willingness to use assets as collateral and even your demographics. We’ll look at several aspects individually.

    Creditworthiness and Profitability

    Perhaps you have a strong personal credit score and your business has earned a profit for several years. In this case, you stand in a better position to qualify for traditional bank loans. With a robust financial history, banks will likely offer you favourable interest rates and repayment terms.

    Demographics Matter

    For younger entrepreneurs, women, or individuals from minority communities, grants may offer a more accessible pathway. Numerous grant programs aim to empower these specific groups, providing not just financial support but often additional resources and mentorship. Seize any opportunity that applies.

    Industry-Specific Opportunities

    The industry in which your business operates also plays a significant role in what type of financing you could secure. Tech companies focusing on sustainability often have multiple grants available, thanks to governments focusing on innovation and environmental impact. On the other hand, some industries, like bars and restaurants may find it challenging to locate suitable grants. In this case, they might be better off seeking loans for their capital needs.

    Risk Tolerance and Collateral

    Do you feel comfortable using your business or personal assets as collateral? Loans often require this type of security, but can involve risk if your business has yet to stabilize. Grants, on the other hand, come risk-free in this regard but have their own set of limitations and eligibility criteria.

    Time and Effort

    Applying for grants can create a labor-intensive process. They require a detailed business plan, financial projections and often ongoing reporting if you’re awarded the grant. Loans, usually, happen quicker but start the repayment clock immediately.

    Flexibility in Usage

    Loans often provide more flexibility in how you use the funds. Comparatively, grants may have strict conditions on the allocation of the money. If you need freedom in your financial decisions, a loan might suit your style.

    Grant vs Loan: The Bottom Line

    No one-size-fits-all answer fits every business. Your unique business situation will dictate which option works better for you. However, most Canadian businesses employ a mix of both grants and loans to meet their various needs. Assess your situation carefully, consult professionals if needed, then choose the path that aligns best with your business goals and capabilities.

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    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications