The Difference Between a Grant and a Loan

If you live in Canada, it’s likely that you’ve heard about government grants as a source of financial assistance. You’ve probably also heard about loans as another means of acquiring the funding you need to carry out your business projects. 
So what’s the difference between a grant and a loan? Each option has their own strengths and weaknesses, but before we dive into the grants vs loans debate, let’s first take a look at what grants and loans are.
Related article: Government Business Grants for Canadian Startups

What is a Grant?

A grant is a financial award that the government gives to an individual, business or institution for the singular purpose of furthering the execution of a project that will be beneficial to the Canadian public. Unlike cash donations, which can be used by the recipient for any purpose without any specifications on how to use it, grants have specific stipulations set by the government. 
Acquiring grant funding requires that you obtain, fill, and submit an application alongside any other relevant paperwork that may be needed. You’ll also need to pass the eligibility criteria as well as demonstrate adequate knowledge, interests, and capability in the field for which the grant is to be given. Then there will be a shortlisting process in which the eventual recipient of the grant will be chosen. 

What is a Loan?

A loan is money you borrow from a person or financial institution that you have to pay back after a certain amount of time with additional charges called interest. When you receive a loan, you can use the money for anything you see fit, and there will be no repercussions unless you defect on the repayment of the loan.
A loan can be in two forms, either a one-time loan or an open-ended line of credit up to a maximum amount. The most common of the two is the one-time loan, which is a specific amount received by the borrower to be repaid either by instalments or on a due date. An open-ended line of credit is a pre-approved loan that can be repeatedly collected up to a limit and then repaid even before the agreed due date.
There are two types of loans, namely, secured and unsecured loans. With a secured loan, the borrower will require a collateral property such as a car or house. This means that if you fail to repay the loan at the stipulated time, the borrower can take possession of those properties. However, an unsecured loan does not require such and is, in fact, less common and less often dictates lower loan values.

Differences Between a Grant and a Loan

Repayment

This is perhaps the most significant difference between a grant and a loan. Every loan that you take requires that you pay back the amount that you borrow as well as pay the interest rate. With grants, however, you do not have to repay any of the funding that you receive.

Source

Grants typically come from the government, either at the federal or provincial level. There are some occasions where corporate organizations and foundations give out grants, primarily to non-profit and charitable organizations, but these are rare. 
Loans, on the other hand, can easily be obtained from virtually anywhere, including private parties or companies. Typically banks or other related financial institutions are the ones to give out loans, but the government can also do so depending on the peculiarities of the situation.

Application and eligibility 

The application process for a grant is usually a very long one. In most cases, it requires the services of a grant expert if it is to be done right. On the contrary, a loan is relatively easy and straightforward to apply for and requires considerably fewer formalities and processes. Also, not just anybody is eligible to apply for a grant. You will at the very least need to have an interest and considerable knowledge related to the grant for which you want to apply. 

Amount

The amount of funding you can get from a grant is typically lower than that of a loan. It is only in rare cases that more substantial amounts of money are given out as grants. Contrarily, the average loan deals with figures in the thousands and tens of thousands. The amount of money you can get with a grant is almost always fixed while loans tend to be more flexible.

Collateral

It is extremely rare to need collateral or a guarantor to receive a grant in Canada. However, because of the higher risk involved with loans, it is common practice for the bank or financial institution to request some form of security for their money. In this case, borrowers will have to place collateral, usually property, on the line.

Advantages of Grants over Loans 

  • You do not have to repay the money you get from a grant. It’s essentially free money.
  • There is less risk involved with a grant since it does not entail paybacks, interests, and collaterals.
  • With a grant, you are able to grow your business with support from government programs.
  • Winning a grant comes with benefits such as prestige, publicity and networking opportunities

Summary

We hope we have been sufficiently able to clear the air concerning the differences between a grant and a loan. If you are looking to get financial aid for a project or to scale up your business, you may stand to gain a whole lot more from applying for a grant in Canada compared to loans.
Do you have other questions about what grants are out there? Or perhaps you are wondering how to get a grant for your business in Canada. As grant consultants, we have the expertise and the experience to help you. Start getting ‘granted’ today by filling out our Grant Calculator.
Related article: Government Grants for Small Business

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