Short answer: It depends on your business type. Grants are money you don't have to pay back (but they're hard to get and usually require you to prove you're helping the community). Loans are easier to get, but you have to pay them back with interest. Most small businesses use a mix of both—or start with a loan to prove the idea works, then apply for grants later.
Let me break it down.
What's the Difference Between a Grant and a Loan?
This is the question I get asked most. Here's the simple version:
Grants
- Money you don't pay back
- You pay tax on it (it counts as income)
- Hard to get – you need to prove your business helps the community or solves a social problem
- Examples: businesses that support disabled people, protect the environment, or regenerate local areas
Loans
- Money you must pay back (usually with interest)
- You don't pay tax on the loan itself (though the interest might reduce your tax bill)
- Easier to get – you just need a solid plan and proof you can repay it
- Examples: start-up loans from banks, government schemes, or credit unions
Bottom line: Grants are harder to get but free. Loans are easier to access but you have to pay them back.
How Much Does a Business Loan Actually Cost?
This is where people get nervous—but it's probably cheaper than you think.
What you'll pay in interest (UK, 2024-2025):
- Government-backed start-up loans: Around 6% per year
- High street banks: Between 5-10% per year (depends on your credit score and plan)
- Credit unions: Between 3-8% per year (often cheaper for local businesses)
Real example:
If you borrow £10,000 at 6% interest and pay it back over 5 years, you'll pay roughly:
- £193 per month
- £1,600 in total interest (on top of the £10,000)
Compare that to a credit card (18-25% interest) or an overdraft (15-40% interest), and a business loan is much cheaper.
The catch? You need a plan that shows how your business will make enough money to pay it back.
Do I Need My Own Money to Get Funding?
Here's the uncomfortable truth: yes, most investors want to see you've invested something too.
But this doesn't mean you need £50,000 sitting in the bank.
What "investing in yourself" actually looks like:
- You've taken out a small personal loan to put into your business
- You've sold your product/service in advance to prove people want it
- You've started small (like running classes or events before opening a full space)
- You've put in time and effort (customer feedback, testimonials, research)
Why do investors care?
Because if you've got nothing to lose, they've got everything to lose.
If you've borrowed money yourself (and you're responsible for paying it back), it shows:
- You believe in your idea
- You're serious about making it work
- You'll fight harder to succeed
What if I genuinely have no money?
Then you need to prove people want what you're selling before you ask for funding.
This could mean:
- Running a smaller version of your business first (like pop-ups, renting space, or online classes)
- Getting testimonials from people who'd pay for it
- Building a waiting list of interested customers
- Starting small and learning what works (even if you're not making profit yet)
I has a coaching client who's doing exactly this—she runs kids' classes in someone else's café while she builds up customer feedback and figures out her costs. When she applies for funding, she'll have proof her idea works. That's worth more than £10,000 in savings.
Grants vs. Loans: Which One Should I Go For?
Here's how to decide:
Go for a GRANT if:
✅ Your business helps the community (like providing disability access, supporting underserved groups, or improving local areas)
✅ You have a social impact angle (environmental, diversity, inclusion)
✅ You're willing to compete (grants are harder to get because everyone wants them)
✅ You can prove people need what you're offering (testimonials, waiting lists, local demand)
Where to find grants:
- HMRC Grant Finder Tool – put in your postcode to see what's available
- Power to Change (for community-focused businesses)
- Your local council (many have small business grants)
- Disability or inclusion-specific funds
Go for a LOAN if:
✅ You need money quickly
✅ You have a clear plan showing how you'll make money and pay it back
✅ You're willing to take on personal responsibility for repaying it
✅ Your business doesn't necessarily have a "community benefit" angle (and that's fine!)
Where to find loans:
- British Business Bank Start Up Loans (government-backed, around 6% interest)
- High street banks (start-up business loans)
- Credit unions (often cheaper rates for local businesses)
- Angel investors (they give you money in exchange for part-ownership of your business—you don't repay it, but you give up some control)
What Are the Downsides of Applying for Grants?
Let's be honest, grants aren't easy. Here's what you need to know:
Problem #1: Everyone wants them
Grants are competitive. You're up against hundreds (sometimes thousands) of other businesses.
Problem #2: They take ages
Grant applications can take 3-6 months to get approved. If you need money now, a loan is faster.
Problem #3: You need to prove you're helping people
If your business is just about making profit (nothing wrong with that!), you won't qualify for most grants. They're designed for businesses that serve a bigger purpose.
Problem #4: You still pay tax on them
Grants count as income, so you'll pay tax on the money (even though you don't have to pay it back).
What Do I Need in My Business Plan? (Whether It's a Grant or Loan)
Whether you're applying for a grant or a loan, you need to show five key things:
1. You've invested something yourself (even if it's borrowed)
Even a small loan you've taken out shows you're serious.
2. You've done your homework
Show:
- Who else is doing something similar (your competitors)
- What makes you different
- Why people in your area need what you're offering
3. Real feedback from real people
Testimonials from customers (or potential customers) are gold. If you're already running a version of your business, get their feedback and include it.
4. How you'll help the community (especially for grants)
If you're applying for grants, talk about:
- How you'll support underserved groups
- Disability access
- Jobs you'll create
- How you'll improve the local area
5. A realistic money plan (including the tough months)
Don't just show the good months. Show you've thought about:
- Quiet times (like school holidays if you work with families)
- Seasonal dips
- How you'll manage when money's tight
Investors trust people who've thought about the hard stuff, not just the exciting bits.
What If I Have No Money Right Now?
Then start smaller.
Here's what you can do:
- Run a test version of your business (smaller scale, lower cost)
- Get feedback from your first customers
- Build a list of people who'd pay when you're ready
- Learn your money patterns (busy times, quiet times, what things actually cost)
- Write a plan based on real numbers (not guesses)
When you're ready to apply for funding, you'll have proof your idea works. That's what investors want to see.
So… Grant or Loan?
If you want a grant:
Focus on how you'll help the community, be prepared to compete, and know it'll take time.
If you want a loan:
Build a clear plan, show how you'll make money, and prove you're willing to back yourself.
If you have no money right now:
Start small, prove people want it, then apply for funding once you've got evidence.
Working on a business plan? I offer clarity sessions to help you get your numbers right.