Starting a Non-Profit Organization? Grants vs. Loans

When you are starting a non profit organization, you will find you have access to a number of different financing sources. Grants and loans are the two primary ways small businesses get started in the non profit arena. The main difference between the two is that loans are repaid while grants are not. Nonetheless, you may find you should elect loans instead of grants, depending on your preferences.

Grants: Advantages

The key benefit to grants from any level, whether federal, state or local, is the fact they are totally free money. Grants do not need to be repaid. Grants can be free because they are paid for either through donations or tax money. This means they are allocated toward very specific programs. If you fall within this program, you are granted access to money that other businesses are not granted access to. You will be competing against other organizations like your own instead of competing against profitable businesses, which are often more attractive borrowers.

Grants: Disadvantages

The competition, even though it is between companies of a like kind as you, is very tough. You will have to stand out from other non profit organizations with similar goals as your own. This means you will need to dedicate a tremendous amount of time and resources to the grant writing process, which can be extensive. Grant writing, in fact, is an industry all to itself. You may have to employ a grant writer, typically at a competitive salary, in order to accomplish your goals. Furthermore, once you have achieved the grant, you can only use if for those purposes set out in your application. The funds come with many strings attached, and you will find they are not very flexible.

Loans: Advantages

The main advantage of a loan is increased flexibility. You will have more say in when and how the funds are distributed according to your needs. Many loans to charitable organizations are made at low interest rates through public loan programs. The interest on your loan may also be tax deductible if you are a registered 501(c)(3) organization. Applying for a loan is much easier than applying for a grant. You will qualify based on your status as a business and your credit history. While you will be competing with more companies, there will also be more loans available than grants, meaning you will have increased opportunities.

Loans: Disadvantages

You will eventually have to repay your loan. Furthermore, to be eligible for the benefits of a reduced interest rate or federal guaranty, you will still have to sacrifice some of your flexibility. There is no "best of both worlds" with this option. Any time you take federal funding, whether through a loan or a grant, you will pay for the interest rate deduction with your decreased flexibility. Taking on debt as a non profit is also tricky in terms of getting funding from donors. You will need to disclose your debt and explain their funds may go toward debt payments instead of directly toward your charitable efforts.