When seeking finance, companies look for solutions that are both cost-effective and suitable to their needs. Business loans are a popular route, offering a lump sum of capital for purchasing new assets, covering cash flow gaps or supporting expansion plans. It’s also worth exploring which grants you may be eligible for, as they can provide crucial capital without the cost implications of other sources of lending.

In this article, we compare the differences between business grants and loans, including how they work, their pros and cons and the main eligibility considerations. 

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What is a business grant?

A business grant is a sum of money awarded to a company to support its growth and development. These financial rewards are typically provided to start-ups and businesses in sectors that foster innovation (technology, clean energy, R&D, etc.), plus social enterprises and organisations/initiatives focused on developing a particular region.

Grants can be awarded by:

• the government,
• state or local authorities, or
• private organisations.

Your business must meet certain criteria to be eligible for a grant, which are usually very specific and strict, due to the benefits on offer. Grants are not financial solutions to help boost business profits; their aim is usually to facilitate growth in a particular sector or area of innovation, or to contribute to the wider economy.

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Does a grant need to be repaid?

In principle, no. Grants are to be invested and utilised by the company awarded the funds for growth and development, or a particular purpose, with no obligation to repay the funds. However, successful grant applicants must use the money awarded to them responsibly and according to what’s been agreed with the lender. Otherwise, you may be required to pay the funds back.

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What can a business grant be used for?

The use of grants depends on the conditions of the agreement. Some grants are for more general business use and can be deployed where the company sees fit, to fuel growth, while others stipulate that funds awarded are to be used for, say, research and development purposes.

So, follow the usage and eligibility rules of any grant to ensure you operate within the required conditions.

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What is a business loan?

A business loan is a lending agreement between a bank or financial institution and a business where the lender provides a sum of capital to be repaid over an agreed number of instalments, usually monthly. Business loans come in various forms, can be secured or unsecured and require companies to pay interest on the capital throughout the borrowing period.

Like with grants, funds borrowed must be used for business purposes, but there are typically fewer rules stating how you must use the funds once you have them.

Secured loans and unsecured business loans

As mentioned, you can get both secured and unsecured loans, and it’s important to understand the difference and how this impacts your repayment terms and the risks involved. 

Here’s a quick summary of these two forms of business loan:

• Secured loans: A secured business loan requires businesses to use certain company assets as collateral to secure the lending agreement. This lowers lender risks and often enables businesses to access larger funding amounts and get lower interest rates.
• Unsecured loans: In an unsecured loan agreement, you’re not required to provide business assets as collateral, which helps those without valuable assets available and also offers faster access to funds with greater flexibility. 

Read our dedicated article on the key considerations: Secured vs. Unsecured Loans: A Guide for UK Business Owners.

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Do you need to repay business loans?

Yes. You do have to pay back a business loan, just like you would with a personal loan. How much you're allowed to borrow (and for how long) will depend on the lender. They’ll also set out a repayment plan so you know how much you have to pay back, what your interest rate is, and the frequency of repayments.

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What can business loans be used for?

You can use business loans for most areas of operations, from investing in new technologies, equipment and materials to paying tax bills or hiring new workers. However, some lenders may include eligibility criteria that restrict certain uses for the loan or business/industry types.

Some business loans and debt finance agreements are designed for specific business uses, such as asset finance, inventory finance and property finance.

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The main differences between business grants and loans

When exploring the possible business finance options available to you, it’s important to understand the differences between business grants and loans. Here is a summary of the key differences:

• To repay or not to repay: Unlike a business loan, you don't have to repay the funds in a grant – one of the main draws for new business owners.
• Accessibility: With loans, most businesses will meet the majority of the criteria to apply. However, for grants, you may need to be within a certain location, industry, or period of growth (i.e. grants aimed at start-ups). Even if you meet the criteria, there are no guarantees of being awarded a grant, as there are often quotas and windows for applications each year.
• How your business is assessed: For a business loan, finance providers base their lending decisions on your financial stability and track record, including your credit score, while grant assessments focus more on business models, growth plans and potential economic and industry impact.
• Lenders: Loans are typically offered by banks, financial institutions and private lenders, while grants are usually awarded by the government or local funds.

Here’s a handy comparison table showing differences between business grants and loans at a glance, including the key considerations for companies seeking funding: 

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What are the advantages and disadvantages of a business grant?

Having outlined the main differences between grants and loans, let’s summarise the main pros and cons of seeking a business grant:

Business grant benefits   

• A business grant is essentially free money for your company to use for commercial purposes.
• Funding without repayment commitments eases pressure on cash flow.
• Growth achieved by using a grant can help attract potential investors.
• Being awarded a grant can improve your credibility and reputation.

Downsides of business grants to consider 

• The application process for a grant can be quite taxing and time-consuming, with no guarantee of approval. 
• Some grants for specific locations, industries and purposes, which rules out a significant proportion of UK businesses seeking funding.
• Getting a grant is not easy, and many businesses will not be eligible or successful with their applications. 
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How to search for business grants

There are several avenues to use when looking for a business grant, such as:

• Direct government sources: Gov.uk has specific guidance for finding available grants and a Business Finance Support Finder, which accesses a database of current funding opportunities – currently, there are over 100 grants available. Also, head to Innovate UK, the UK’s innovation agency, which offers funding across all academic disciplines and industrial areas.
• Local networks and listings: This could be through your local council, regional growth hub or chambers of commerce. 
• Sector-specific opportunities: Explore industry networking groups, sector bodies and trade associations. 
• Dedicated grant search tools: GrantFinder, GrantNav and Funding Central are all handy tools for seeing what options are out there.

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Examples of UK-specific grants for businesses

As mentioned above, there are various localised and sector-specific funding routes, as well as direct sources of grants from the government or other organisations. 

Here are a couple of examples of UK-specific grants for businesses to give you an idea of the kind of funding available:

• Growth catalyst early-stage funding from Innovate UK: This is an example of a grant offered to micro and small businesses looking to develop affordable, adoptable and investable innovations in the five critical technologies. Eligible businesses that are successful gain a share of £10 million for this purpose.
• North of Tyne Growth Fund: This is one of various regional grants to help develop commerce and generate growth in the local area, aimed at businesses that are open to expanding into the region. In this specific case, companies can get grants of between £20,000 and £200,000 to cover up to 30% of eligible expenditure.

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How to apply for business grants and loans

Business grants are awarded based on merit, project impact and alignment with funding goals, not creditworthiness, whereas business loans require repayment and are typically based on financial history and ability to repay.

Below are the main steps involved in applying for business grants and loans.

Applying for a business grant:

• Identify grants that match your business type, sector and growth goals.
• Check the eligibility criteria carefully to ensure your business meets all the specific requirements.
• Prepare a strong application, including a clear and compelling project plan, details of how you’ll use the funds, and check what the process involves.
• Follow the instructions and submit your application within the required deadline, providing as much supporting documentation as necessary.
• Await the funding decision and release of funds – if approved, ensure you work within the terms and meet any milestones to avoid breaching rules.

Applying for a business loan:

• Determine your funding needs, intended use of capital and cash flow.
• Compare loan providers from a range of sources, checking eligibility requirements, repayment terms and limits, and calculate the potential cost of borrowing based on term length, interest rates and other charges.
• Gather various financial documents and key business information, as most loan providers will request things like bank statements, revenue forecasts, cash flow statements and credit history.
• Submit the loan application – many banks require you to speak with a member of the business finance team, while digital lenders enable you to apply wholly online, speeding up the application and approval process..
• Review funding offers carefully, checking the terms, repayment structure and rates (looking out for any unexpected fees and judging affordability) before signing a loan agreement.
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Alternatives to business grants and loans

Business grants and loans are both great sources of funding for growing companies, but they're far from the only options available. Here are just some of the alternative business funding solutions to consider:

• Business line of credit: An agreed amount of credit to draw from, where you only pay interest on the money you use, with the full limit becoming available each time the borrowed funds are repaid.
• Merchant cash advance: A revenue-based funding source which businesses pay back as a percentage of future card sales – ideal for retailers and online businesses. 
• Crowdfunding and other sources of equity finance: Raise capital from investors in exchange for a level of control, reward and/or share of profits.

The option you choose comes down to weighing up various suitability factors, eligibility considerations and funding goals and needs.

Iwoca’s Flexi-Loan is a flexible funding solution combining the benefits of business loans with lines of credit, offering fast access to funds and flexible repayment terms, where you only pay interest on the money you draw down. Plus, you can repay the loan early, free of charge and top up credit (subject to approval). 

If you need flexible working capital quickly and easily, without the lengthy application of traditional loans and business grants, explore our Flexi-Loans.

You can borrow between £1,000 and £1 million for a few weeks right up to 60 months. Apply for an iwoca business loan and see how we can help you grow and scale at pace – you’ll get a funding decision within 24 hours.

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Business grant FAQs

Are business grants taxable in the UK?

Yes, most business grants are treated as taxable income. You’ll need to include them in your company’s accounts and report them to HMRC.

How hard is it to get a business grant?

Due to their nature, business grants can be competitive. They typically require a strong business case, clear objectives and alignment with the grant provider’s priorities.

Can start-ups get grants in the UK?

Yes. Many grants are designed for start-ups, particularly those innovating in tech, sustainability, or local economic development. However, eligibility and competition vary by scheme.