Pros & Cons of Grants

webphotography/iStock/Getty Images

Owners who want to grow their businesses must constantly worry about funding their company vision. Grants can be an attractive source for financing, because they inject capital that doesn’t have to be paid back into the business. However, grants can cost businesses in other ways, whether through the time and effort it takes to win them or the conditions that grants place on the company.

Free Money

The primary advantage of grants is that, unlike loans, they don’t have to be repaid. They also don’t require the owners to surrender any equity in the business. A grant is a means of financial assistance designed to help a business grow, add locations in a specific area or serve some other designated purpose. As long as the funds are used as the granting agency intended, the business is in the clear.

Prestige and Promotion

Winning a coveted grant can provide benefits beyond the dollar amount awarded. Such awards can be used to enhance the prestige of the business that wins the grant, particularly for those given by notable organizations. A grant from NASA, for example, or from the National Science Foundation can bring credibility to businesses that operate in those fields. A company can amplify this benefit through a promotional strategy that highlights the award in public relations messages to news outlets, perhaps winning positive press that enhances the company's status in the community and makes it easier to win future business.

Difficult to Get

Because grants benefit businesses so much and because there aren’t many of them, the competition to win them is fierce. A disadvantage of relying on grants for funding is that the application process requires businesses to spend money and other resources to apply for grants they are unlikely to win. Hundreds or thousands of small businesses compete for a comparatively small number of opportunities, so the return on investment for most companies that apply for grants is in the red.

Strings Attached

Grants may be free money, but they rarely come without conditions -- the donor expects you to act in the agreed-upon way to secure the funding. A grant from a local government designed to boost an area that needs economic regeneration likely will require you to set up your office there and perhaps hire local staff, regardless of whether that’s best for your business.

Uncertain Future

Grants may be renewed from year to year in some circumstances, but they can vanish with little notice. A company that relies on grants as a critical source of income can see its business model collapse quickly. For example, if a business is counting on a state grant to grow its tourism business and a new regime takes over on election day, tourism could be a low priority for the newly elected officials. Losing a grant can be catastrophic for a business that depends on it -- more so than for a competitor with a broader source of funding.

References

Photo Credits

  • webphotography/iStock/Getty Images