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Small Business Grants vs. Equity Crowdfunding: Which is Right for My Business?

March 9, 2022 7 min read

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Small Business Grants vs. Equity Crowdfunding: Which is Right for My Business?

A 2021 study found that over a third of all startup failures were caused by a lack of capital. That means that if you’re the founder of an early-stage business, funding is on your mind—and if it’s not, it should be. 

Many entrepreneurs turn to small business grants to help them raise funds in the early days of getting their business off the ground. Small business grants can come from nonprofit organizations, private companies or federal or state agencies, and don’t have to be repaid. But out of all your options, are they the best way to fund a new business? Let’s break down the pros and cons of small business grants, as well as some alternatives—like equity crowdfunding—to see which option is right for you.

What are Small Business Grants?

Small business grants are grants awarded to startups or established businesses. They can be given out by federal or state agencies, as well as nonprofits and private companies. They’re often targeted towards specific types of businesses, such as those owned by minorities or women, or, more recently, ones affected by the COVID-19 pandemic like restaurants, music venues or bars. Like angel investors, crowdfunding, small business loans and friends and family rounds, small business grants are one possible source of funding for your early-stage business.

Small business grants are sometimes described as “free money,” which can be true—there’s generally no expectation that you’ll repay them, and they can offer the opportunity to grow your business at your discretion, without the pressure that comes with a loan or an investment. Too good to be true? Maybe. Grants often come with strings attached, and the application process can be time-consuming, especially when you consider the actual dollar amount of the grant.

What is Equity Crowdfunding

Another option for small business is equity crowdfunding. Equity crowdfunding is the process of sourcing early-stage funding from small investors in exchange for equity in your company through a platform like StartEngine. The number of small businesses raising startup funds through equity crowdfunding has exploded since 2020, as venture capital deals dropped by more than 40% due to COVID-19. So what are the key differences between equity crowdfunding and small business grants?

Amount of Funds

Estimates of the average start-up capital required by small business owners vary: the Wells Fargo Small Business Index Study found that the average owner uses about $10,000 of startup capital, while the Kauffman Firm Survey, consisting of mostly high-tech firms, put that number at $80,000 each year.

The amount of money you’ll need to raise to get your business off the ground depends on a variety of factors, including your business plan, your anticipated profits and your overhead. Small business grants can be as small as $1,000 or as large as $100,000 or more, though you’re unlikely to reach the upper end of that range unless you’re an established company facing hardship. Regardless, grants tend to be a fixed amount that’s decided upon by the organization offering the money.

On the other hand, equity crowdfunding allows founders to set their own funding targets. At StartEngine we rely on two different SEC Regulations, each with a different funding ceiling: Reg CF ($5M) and Reg A ($75M). This approach offers more flexibility for the average founder. Rather than cobbling together startup capital through a patchwork of grants, equity crowdfunding allows founders to focus their efforts on raising the amount they need from a single source.

Consistency of Funding

A staggering 82% of small business failures come from cash flow problems. Of course, cash flow doesn’t just mean the quantity coming in—it also means the rate at which the money flows. If your small business is struggling with cash flow in its early stages, it can be tricky to rely on small business grants. With little consistency in their deadlines for applications, payout procedures and seasonality, even if you manage to win a small business grant, the money might not come when you need it most.

Most importantly, a grant is a one-off payment, and if you want more money, you need to draft and submit more applications. Equity crowdfunding, on the other hand, allows startups to continue raising funds through multiple rounds, building momentum—and a loyal community of investor-advocates—without constantly putting resources towards reassessing your eligibility for small business grants. Of course, equity crowdfunding isn’t instantaneous, either—a StartEngine raise can take from 90 days to one year to reach its funding goal.

Transparency

While many small business grants are targeted toward underrepresented communities or businesses facing hardship, they still suffer from a lack of transparency. Small business grants are often gatekept by institutions with opaque, sometimes arbitrary decision-making processes, whereas equity crowdfunding is open to everyone. Rather than satisfy a panel of judges or board members to win a grant, with StartEngine, you can raise funds from a diverse pool of investors and build enthusiasm at the same time.

Which Option is Right for Me?

Small business grants and equity crowdfunding both offer distinct advantages and disadvantages that, depending on your business, can make one or the other the better choice for you. Let’s talk pros and cons.

Advantages of Small Business Grants

  • You Don’t Have to Repay them: When you receive a grant, you don’t have to offer equity or repay the money
  • The “Waterfall Effect”: Winning one small business grant builds your credibility in the community and makes it easier to get more grants going forward

Disadvantages of Small Business Grants

  • Competitive and Time-Consuming: Applying for small business grants can involve mountains of paperwork, and sometimes you’ll be competing with hundreds of businesses who’ve applied to same grant—meaning that grant applications may not offer the best reward on your time investment
  • Not Transparent: The decision-making behind grant awards can be opaque and arbitrary, and you can’t be sure that the awarding body is looking at the true potential of your company
  • Strings Attached: While grant money doesn’t have to be repaid, it can come with strings attached, such as government oversight, audits or time-consuming reporting
  • Less Visibility: While small business grants may help you build credibility within the insular world of nonprofits and organizations that offer small business grants, a successful equity crowdfunding campaign wins exposure and builds excitement among thousands of people

Why Equity Crowdfunding?

At StartEngine, we believe that equity crowdfunding is the superior choice for many founders. While the funds you raise on our platform aren’t “free money,” by offering non-voting, common shares, you can maintain greater control over your company via equity crowdfunding than other fundraising options—plus, the potential dollar amounts are much larger than those offered by most small business grants.

On top of that, a StartEngine raise works to build publicity. Your investors—who can buy in for as little as $100—become your brand ambassadors, building visibility and promoting your product around the country. With multiple rounds, you can fuel continued growth and build on your momentum instead of going back to the drawing board to fire off more grant applications when you need more money. And once you’re up and running, equity crowdfunding is often cheaper and less time consuming than fighting for grants or chasing funding through other avenues.

A grant is a one-off payment, whereas equity crowdfunding allows startups to continue raising funds through multiple rounds without constantly hunting for and completing time-consuming applications—giving you the funding you need to help your business realize its full potential.

Ready to Start?

If you’re interested in working with StartEngine to get your business off the ground, apply to raise funding on the StartEngine platform today!

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This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

 

Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

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