The government offers various financial assistance programs to struggling small businesses, but understanding the options out there, and if you qualify, can be difficult. Plus, when you’re worried about just staying afloat, the last thing you want to do is wade through a bunch of complicated jargon. You’ve already got a lot on your plate juggling invoices, making sure your employees get paid on time, and possibly fending off bankruptcy.
Finding the time to make sense of the different government programs you may be eligible for can seem like climbing a mountain.
The ClaimYourAid team has put together this explainer of terms like government aid, grants, credits, refunds, and loans for small businesses to help you make sense of it all.
What Is the Difference Between a Government Grant and a Government Loan?
This is the question our team often gets when we’re working with small business owners to help them find out if they qualify for government aid.
Government Grant
A government grant is different from a government loan in one very simple way: It doesn’t have to be paid back.
Yes, you read that correctly! Government grants are free money in many ways — you pull together information that proves your business qualifies for a grant (or the ClaimYourAid team does this for you!), and you’re given a check to spend.
The principle idea of government grants is to provide money for projects that the government believes will improve the economy or public as a whole, and grant funds are earmarked yearly to aid not just small businesses but non-profit organizations and even individuals too.
Grants can come from any of the levels of government from federal down to local. While you may have heard of some of the larger programs out there that come from acts of Congress, there are more localized government grants too. The New York State COVID-19 Pandemic Small Business Recovery Grant Program, for example, was created to help New York entrepreneurs and can provide as much as $50,000 in aid for small business owners in the Empire State who were hit hard by the pandemic.
So what’s the catch to this free money? Grants are notoriously harder for small businesses to get than loans and often require you to submit grant proposals and other types of paperwork to the government to prove your business qualifies.
Eligibility for government grants can depend on a number of things that we check for here at ClaimYourAid. For example, some grants are specific to certain industries, while others are specific to certain locations. Others carry specific restrictions on how the money can and cannot be spent.
Government Loan
When the government gives you a business loan — whether it’s the Economic Injury Disaster Loan that’s been offered during the pandemic or any of the loans out there for veteran entrepreneurs (such as so-called VA loans administered by the Small Business Association) or even women-owned businesses (such as loans available through New York State’s Division of Minority and Women’s Business Development) — the money is going to have to be paid back.
Typically the interest rate on a government loan will be lower than you’d get from a traditional bank, and you may be given a longer amount of time in which to pay the money back. There might be other advantages as well, like not needing collateral to secure the loan, meaning you may not have to put up something of value that you could lose if you can’t pay the loan back.
Another benefit government loans offer over traditional bank loans is that they require lower down payments. Just like getting a mortgage for a house, when you get a small business loan, you are generally required to put money down. Down payments through private lenders can be pretty high: As much as 40% down. Government loans, on the other hand, typically have much lower down payment requirements. This way you can use the money you have on hand to invest in your business, instead of putting it down to secure the loan.
“Forgivable” Government Loan
There are some loans called “forgivable loans,” which means that the government may decide to excuse a small business’ debt on a loan. During the COVID-19 pandemic, this was offered to small business owners. Many applied for, and received, funding through the well-known PPP or Paycheck Protection Program — where they were told they didn’t have to pay the government back at all.
What’s Government Aid?
OK, so we covered government grants vs. government loans. What about government aid?
This is the overarching term for any monies you might receive from the government. This covers government loans and grants plus other financial assistance that your small business might qualify for, such as tax credits and refunds.
Tax Credits
It might sound like another way to say “tax deductions,” but tax credits are very different. And yet, they’re another way you can get money for your small business from the government … money you won’t have to pay back.
Essentially, a tax credit is an amount the government will allow you to take off the amount of income tax your small business owes each year for things like providing your employees with health insurance or for providing paid leave to employees who have just welcomed a new child into the family.
So how is this different from a tax deduction? When you deduct the amount of money you spent on business expenses, it reduces the amount of revenue that is left for the government to tax. It’s important, and it can certainly reduce your overall tax bill, but it’s not as though deducting, say $50,000 for office supplies will mean you pay $50,000 less in taxes.
When you qualify for a government tax credit, on the other hand, the size of your credit is literally an amount of money you can get back from the government. Say the government is going to give you a Work Opportunity Tax Credit (WOTC) because you hired a veteran to work for you, and the credit is $2,400. That means you may get a check back from the government for $2,400!
Refunds
This other type of government aid is probably one that people know best, although it’s not something most small businesses qualify for. Sometimes small businesses will qualify for money back from the government in the form of a refund if they’ve overpaid their payroll or sales taxes during the year — much the way an individual can get a check from the government when they file their income taxes and they’ve overpaid during the year.
Tax refunds for small businesses are rare, but you see them most often with business owners who’ve created a C-corporation, and they work just the way an individual tax refund would. The business can literally get a check back from the government!
Is Loan or Grant Better?
The right financial assistance comes down to the right fit for your business. Both government grants and government loans can help small business owners recover from economic hardship and grow their business. Obviously a grant is more desirable since it does not need to be paid back, though it will likely require more work on the front-end to find one you qualify for before you apply.
And of course there are the other options such as tax credits and refunds to consider too!
Click here to schedule your free consultation with a member of the ClaimYourAid team to find out if your business qualifies for government grants, credits, or refunds.