Startup Business Grants vs. Crowdfunding: Which is Better?

What Are Startup Business Grants?

Startup business grants provide financial awards to eligible applicants that don’t need to be paid back. On one hand, it’s often considered “free capital” because there’s no repayment, as there is with a traditional loan. On the other hand, small business grants are extremely competitive and have narrow eligibility requirements.

For example, the U.S. Small Business Administration (SBA) has several grant programs. However, the agency notes that these grants are not available to help launch or expand your existing business.

Instead, these grants are generally reserved for specific industries, such as manufacturing and scientific research and development.

For example, there are some federal grants available through both Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.

Additionally, some SBA grants go toward community organizations. These entities advocate for entrepreneurship and support specific communities like veteran-owned businesses or resource partners like Small Business Development Centers (SBDCs). Other government grants may be listed on Grants.gov.

Grant funding can also come from private organizations, corporations, or foundations. Some examples include:

• The FedEx Small Business Grants Program

• WomensNet Amber Grant

• Verizon Small Business Digital Ready $10,000 national grant

Startup business grants can come from a variety of places. However, they typically have different focuses and cater to specific industries and are highly sought after. From a business standpoint, taking advantage of grant opportunities can be ideal for two major reasons. First, they’re not saddled with interest or repayment requirements. Second, grants are a form of non-dilutive funding, so you don’t have to exchange any equity or ownership for capital.

What Is Crowdfunding?

Crowdfunding allows business owners to launch a campaign and garner support in the form of financial backers. Through crowdfunding platforms like Kickstarter, Indiegogo, and Fundable, you’re able to share your business idea and raise money from potential customers and buyers.

Instead of going to a bank looking for a loan or filling out a grant application, you can go directly to the market for monetary support.

It can be a great way to develop a customer base, boost brand awareness, and validate demand in the market. However, for it to work, you need a solid campaign that attracts more than just clicks. You need them to convert into backers or buyers for it to be a success. Not only that, but you also need to find the “crowd” to support your venture.

Typically, crowdfunding campaigns have many backers pledging small amounts. For the campaign to succeed, you need plenty of backers. If you don’t get the amount needed, you might walk away with nothing. Depending on the platform, you may not receive any funds if you don’t reach your goal.

Startup Business Grants vs. Crowdfunding

Startup business grants and crowdfunding are both alternative options for financing. So, if you have a business plan and are looking to launch or are in the beginning stages of building your company, these two choices could provide capital.

Like with any type of financing, there are definite pros and cons to consider.

Potential Benefits of Startup Business Grants

• Access to free capital: You don’t have to repay the money you receive, and there’s no interest like a loan.

• Prestigious and adds credibility: Certain startup business grants carry a level of prestige and can immediately add credibility to your venture.

• Non-dilutive: You maintain 100% ownership of the company.

Potential Disadvantages of Startup Business Grants

• Highly competitive: Startup business grants are in demand because of their obvious benefits, making them highly competitive and difficult to get.

• Limited eligibility: Many startup business grants have very specific eligibility requirements and may only be available to founders and owners in certain industries.

• Documentation requirements: Typically, you’ll need to provide lots of documentation about your business, goals, needs, and potential outcomes.

Potential Benefits of Crowdfunding

• Provides faster access to funds: If timing is a major issue, crowdfunding can be a faster way to obtain capital than startup business grants.

• Validates demand for business: If you’re just entering the market, crowdfunding can give you an idea if there’s demand for your particular product or service.

• Builds new customer and brand awareness: Crowdfunding can be a more direct way to connect and build a customer base and increase brand awareness.

Potential Disadvantages of Crowdfunding

• Potential fees: While you can raise capital through crowdfunding, the platform typically takes a cut of the amount raised. That may be a flat percentage. On top of that, there may also be payment processing fees.

• Requires strong marketing and promotions: The fact is that many great products and services don’t succeed on crowdfunding platforms. To succeed, you generally need a solid promotion strategy and a marketing plan.

• Not guaranteed: Just because you publish a crowdfunding campaign doesn’t mean you’ll reach your goal.

What Factors Can Impact Your Decision

If you’re weighing startup business grants and crowdfunding as potential financing strategies, here are some factors that can impact your decision.

1. Time and Effort

Startup business grants come with a significant investment in time and effort upfront. You typically have to complete a lengthy grant application, provide detailed descriptions, as well as supporting documentation. Typically, founders need a solid business plan and understand how the funds will translate into outcomes. Additionally, grant timelines can be weeks to months.

Crowdfunding doesn’t require as much time and effort upfront. However, you still need to create campaign materials, marketing videos, social media posts, etc. These tasks may seem easier on paper, but they can still take a significant amount of time. Plus, it requires consistent engagement and effort to reach your goal.

2. Funding Speed and Amount

Crowdfunding can get you faster funding than grants.

On the other hand, grants could potentially take months and be a long, drawn-out process. In both cases, if your campaign doesn’t reach its goal or you don’t win a grant award, you won’t receive funding.

When it comes to funding amounts, you could potentially receive more capital through grants. However, that depends on the program and your industry. Crowdfunding campaign amounts can vary widely by project.

3. Value and Costs

Startup business grants could provide a lot of value to your business. On top of receiving capital you don’t need to repay, grants could elevate your profile and give your business more prestige.

If a government agency, foundation, or nonprofit awards you a grant, it’s essentially a stamp of approval. It can provide immediate recognition. When it comes to costs, government grants don’t have any application fees. Smaller organizations may have nominal fees. Most of the costs come in terms of time and effort spent.

Crowdfunding can provide value by getting your business in front of a new audience. In general, there are more fees and obligations. Platforms generally take a percentage of what you raise. Plus, you might have rewards or perks for backers or need to create marketing assets for email and social media.

If done well, a crowdfunding campaign can create early buzz, generate revenue, and establish an audience.

4. Your Industry

When comparing startup business grants and crowdfunding, your industry can determine which option is best. Many e-commerce, consumer technology, and direct-to-consumer brands can use crowdfunding as a way to get presales.

Grants tend to focus more on scientific research and development, innovation, or supporting underserved founders. In general, crowdfunding can be good for building an audience and launching a product, while grants are more mission-focused. 

Final Thoughts

The startup costs to launch a business can be prohibitive, especially if you don’t have the personal savings to back it yourself. In these cases, startup business grants and crowdfunding can be attractive options to fund your new venture.

Determining which option is best comes down to eligibility, capital needs, speed, time, and your industry. Researching both can help you make an informed decision that aligns with your business goals.