The pros and cons of business grant funding and loans


Every business needs a bit of extra help sometimes, particularly when it comes to finance. Having extra cash flow or a contribution towards a project can help you bring in new equipment, hire employees, and develop your business, so it’s good to know what options are out there!

This article will cover the two main kinds of funding you can explore – grant funding and loan funding – and how they might be able to work for your business. There are also various forms of alternative finance, such as peer to peer (P2P) lending.

Grant funding

When people think of business funding, they’re likely to be thinking of a business grant. Grants offer a sum of money towards the total cost of a project, and this money does not have to be repaid. They’re often funded by Government initiatives, so target certain types of businesses and projects to help enable growth in these areas.

Grants are generally retroactive, meaning that you agree your project ahead of time with the agency, complete your project, and the amount agreed upon is repaid after the project is completed. This is both an anti-fraud measure and a way of the agency controlling the amount of funding they release.

Unfortunately, consumer businesses and start-ups are often ineligible from grant funding due to the competition in these sectors. However, new schemes open on a regular basis, so it’s always worth getting in touch with the Growth Hub to see what might be available!


  • The biggest pro of grant funding is that the money you receive does not have to be repaid – this contribution can help you save money on your project, or enable spend in other areas
  • As funding projects are targeted towards certain initiatives, they can encourage you to develop areas of your business you might not have considered, such as employing a consultant, or examining your environmental impact. These projects can help make businesses more efficient, better for the planet, and explore new angles for your company.


  • Grants only offer a percentage of the cost of your project – generally between 10-30%, though some grants can be as high as 50%. You are responsible for sourcing the rest of the funding needed to complete the project.
  • Start-up businesses are often excluded from grant support. Grants are usually funded by taxpayer money, so agencies need to ensure that the projects they fund offer good value for money, and that’s difficult for them to gauge when your business doesn’t have a track record. Most grants will consider start-ups from two years of trading.
  • Grants can be highly competitive – everyone loves a bit of free money, after all! Your project needs to represent great value for money, and match well with the priorities of the grant.
  • Grants are restrictive with what they cover, and are often only available for two purposes; the purchase of equipment (capital funding) or consultancy, which includes research and development (R&D) projects (known as revenue funding). They can’t be used for marketing or working capital for your business.
  • Grants are often conditional – they’re to support business growth, meaning that you often need to agree to create jobs at a rate set by the grant provider, or may have to agree to pay the Real Living Wage, hire from underrepresented groups, or reduce your carbon emissions.

Loan funding

Loan funding is often viewed less favourably; however, it can be a great opportunity for your business. Loans are often provided by non-profits, community groups or charities, and offer large sums of money, which could be enough to cover your whole project, upfront. They can also be used in partnership with grant support to help you with your development.

Almost every business sector can access loan funding, as the repayable nature of the funding means it can be a lot more flexible. However, as with every loan, that money does need to be repaid and often with an interest rate.


  • As stated above, some loans can offer enough to cover your entire project cost, and amounts can be as little as £500. This means that you can borrow as much or as little as you need to, and the loan agency will never advise that you take out more than you could reasonably be expected to pay back.
  • The loan programmes we advise businesses to consider are all non-profits. Their loans are generally unsecured, meaning you aren’t laying collateral (like a house or car) against your loan.
  • Unlike a bank, agencies like the Business Enterprise Fund aren’t trying to make a profit, so whilst they do charge an interest rate, this is just to ensure that they can keep the service running and have a good amount of capital to lend out. These interest rates tend to be fixed, meaning they won’t increase over the period of your loan, so you can always calculate your repayment.
  • Loan funding can be used for almost anything in the business, including things that grants won’t cover, such as marketing or office equipment. It can also be used as working capital, to allow a business better cash flow.
  • Business loans aren’t limited by sector – even consumer businesses, such as cafés and retail outlets can access them, despite being generally excluded from grant opportunities.


  • The biggest con of a business loan is that whatever you borrow, you have to be prepared to pay back, generally with added interest. This can put a financial strain on a business, particularly small consumer businesses and start-ups.
  • Interest rates with some loan schemes can be much higher than a business loan from your bank – this is due to the loans being unsecured. Businesses who have a good relationship with their banks may find going directly to their bank manager better-value than a loan scheme.
  • Like any loan, you can be refused for a business loan, particularly if you have previously declared bankruptcy or are facing financial difficulties.

Both forms of funding have their benefits and drawbacks, and it’s always best to explore your options by contacting your local Growth Hub. But if you need a bit of extra cash flow, you don’t need to feel stuck – there’s always schemes available!