Grant vs. Loan: What's the Difference?

A thousand dollars in time saves nine. Everyone who has ever faced financial hardships knows it. Do you wish to improve your life, launch a new business venture, or pursue education goals? The entire plan may be in jeopardy if there is not enough money available when it is needed. Then, you can either work several jobs for years until you earn the required sum or search for a source of funding. The second seems more appealing, right? So, let's figure out where you can find the money and answer the question that confounds many people, "What is the difference between a grant and a loan?"

Picture this: you have an idea of a startup with all the chances to hit the jackpot. If everything goes smoothly, it'll bring $10,000 of profit monthly. However, $30,000 is needed to launch the project, and you do not have this sum. What's the solution?

First, you can go to a bank or an alternative lender and ask them to give you the money for several months and promise to pay it back. This is what a loan is. Here's how it typically works: you ask for a particular sum, and an individual lender or a financial institution considers your application. In the case of approval, you will be given the agreed-upon check. Then, you have some time to repay the loan and interest in a number of installments. Their size affects the total repayment amount, so it's crucial to understand the terms. The period to return the sum can last from several weeks to a few years, depending on how much money you ask for.

To ensure everything goes smoothly, the parties must sign a special form of loan agreement. It specifies the amount of the loan and the interest and payment schedule. Hiring a lawyer is not necessary in that situation. To create a legally binding contract, just utilize an online loan agreement template and fill in all the required details.

Meanwhile, if you don't want to repay the money, you have another option. You can describe your project and its perspectives in an application and send it to a special agency or foundation. The latter will consider your presentation, and if your startup is worth attention, it will gift you the money. This is the main difference between a loan and a grant: you don't have to return the latter even if your startup becomes a dead loss. There were even situations when people received a grant as repayment of a loan!

There are no limitations on what you can do to the funds. But, if a lender believes the money will be used for something irrelevant or risky, they have the right to refuse your application. Besides, there are other important factors they usually consider:

You can be given from several weeks to a few years to repay the whole sum. The number of installments will directly affect your repayment schedule, determining how frequently you need to make payments and the total interest paid over time.

Here are the most common things they need money for:

Keep in mind that taking out a loan needs to be a responsible and thoughtful decision. Assess your financial status and plan your actions in case of an emergency. In addition, to ensure you can repay the loan, consider all potential risks and have a backup plan. Owing money to someone always feels like a burden, and you should be sure you're ready to bear it.

The kind of loan you have to apply for directly depends on your needs, financial capabilities, and circumstances. Here are the most common of them:

Individuals and businesses receive financial support from many organizations. Nonetheless, the majority of them only provide funding for specific initiatives and goals that have the best chance of boosting the economy or social well-being. If you need a grant for a new luxurious dress, you, most likely, won't get it, but if you want to establish your personal brand of clothes and need equipment, you will. Here are some other cases when you are eligible for grants: 

If you're an entrepreneur with an innovative idea, a grant will help you push your project. You can buy equipment, employ a team of experts, and pay for the majority of necessary expenses. To find the organization that can give you this opportunity, check the list of state grant programs for small businesses or consult your local authorities. 

No matter what step of the academic ladder you take, educational grants are an excellent way to fund your future. For many people whose income level does not allow them to cover tuition fees and living expenses, it is the only opportunity to get the degree they dream of.

A grant can assist you in putting your ideas into practice if you have suggestions for how to make your community better.Professional foundations will be pleased to assist you in starting a project that benefits the environment or makes the urban space more comfortable.

Many brilliant ideas were killed in desk drawers because their creators lacked the funds to complete them. A grant may help you pursue your most inventive endeavors as an inventor, artist, or creative entrepreneur. You will receive a sizable payment that will cover the price of product development, marketing, and distribution. Who knows, maybe your name will be in books in the future. 

Life is unpredictable, and no one knows when one can find oneself broke. In times of struggle or personal crisis, a grant can become a real lifeline, especially when there is an urgent need to cover medical bills or rent a new apartment. 

At some point, any enterprise needs a space to grow, but the financial contribution it requires may be unbearable for one person or even several business companions. In this case, applying for a grant is the best option. It will cover your expenses — your company will provide new workplaces and pay higher taxes. Win-win! 

For example, in 2009, Airbnb received a considerable sum from Y Combinator, a famous venture capital firm. $20,000 was enough to improve the platform and grow its user base. After this event, the company established itself as one of the world's top online rental markets.

There are numerous tax intricacies when it comes to grants and loans.

Grants are typically exempt from taxes. This implies that the money you receive will not require any payment to the state treasury from you. This is so because grants aren't regarded as income; they are usually given out for particular objectives like research or education. For instance, if you are unable to pay for your college education and apply for financial aid, the only things you gain from it are a degree and new knowledge, neither of which have material value.

However, depending on the specific terms and conditions of the deal, certain grants might be taxed. For instance, you might have to pay the state a portion of your money if you receive a sizable sum for a business or investment. All the relevant information is usually included in the grant application rules, so you shouldn't face any unpleasant surprises. 

Loans, on the other hand, are taxable only when the interest is forgiven. It means that when you borrow money, you must not pay anything on the loan amount. However, if the borrower cancels the deal or forgives you a part of the sum, the latter turns into income, which means you have to share a part of it with the state.

When it comes to picking a source of money for any purpose, the most important thing is to choose what meets your individual and professional needs best. So, to let's sum up the loans vs. grants issue:

So, is a grant a loan? The answer is "No." Both these types of financial support aim at helping people cover their expenses, but the application mechanisms, use of funds, and repayment terms differ. While loans are limited only by your needs and credit history and can be spent on anything, the sizes of grants are usually defined by the organizations that give them and are provided to those who have something to offer to society. Nevertheless, both of them can become lifesavers in critical situations or help you to fulfill your dreams. Taking money is not that scary if you can easily reply to the "What is a grant loan?" question, is it?