Understanding business grants as a funding source for your startup

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Startups and business owners of any size should always be looking for ways to strengthen their balance sheet. In the accounting industry, it's commonly said that the balance sheet reflects the true health of a business.

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Since startups and small businesses are inherently risky, founders should be looking for alternative ways to increase their liquidity and access to capital at all times, which will improve the health of their balance sheet. It's generally advisable for startups to have at least 4 months of cash on hand at all times. While this isn't always achievable, it's good for businesses to have a war chest of opportunities for funding ready, if they need to pull a lever.  

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Debt and equity are the most common examples of capital sources for businesses, but business grants can be a less well-known area to explore. Each year, we work with our small business clients to find which grant opportunities best suit their needs and help ensure their financials are in great shape to stand out in the application processes. However, many startups and small businesses are unaware of the multitude of grants available and the various implications of these grants. 

Understanding business grants

Grants come in a variety of shapes and sizes, but unlike loans, grants don't need to be repaid. This makes them an attractive option for businesses looking for a capital infusion without the stress of loans with high interest rates or funding that requires giving away valuable equity in the company.

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Grants are often “targeted” programs, whether from government agencies, public/private partnerships, or private institutions. This could include targeting life science startups, the green energy sector, or women-owned businesses, for example.

Are grants taxable?

Since grants don't need to be repaid, they're generally taxable at both the federal and state levels. Given startups are typically “pre-revenue” and have no tax obligations in the early days, founders and business owners should work with their accountants to determine if a grant will cause taxable income.  

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For example, you have a startup with a net loss from operations of $250,000. You find a lucrative startup business grant for $350,000. Ignoring all other factors, the first $250,000 of your grant would be tax-free but the remaining $100,000 would be taxable. 

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In some cases, we've advised companies to split the grant(s) between years to minimize the tax impact.

Searching for business grants

Depending on how quickly you want to secure grant funding, there are different paths you can take. One path is hiring a specialized grant consultant that will find applicable grants and apply on your behalf.  However, this comes with occasionally high fees or a percentage of the grant as their fee. Small businesses should exercise caution in going this route given that the fees can often be confusing and detrimental to the business in their early days.  

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If you have additional time and resources, there are dozens of websites (both government and private) which allow you to search for grants based on your business profile. Check out OpenGrants for a sleek platform to search for your next grant as an example.  

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Here are some of our favorite avenues you can explore:

• Government agencies and partnerships: Government websites such as Grants.gov or the Small Business Administration (SBA) website provide a multitude of resources for small businesses and startups looking for grants.some text
  • Small Business Innovation Research or SBIR is a popular agency within SBA for startups, especially those in tech, green energy, or emergency industries. 
  • DARPA or ARPA-E are US Federal Government programs with the military (DARPA) or Department of Energy (ARPA-E).  These can be extremely lucrative grants but often do come with governmental oversight or audit requirements.  
  • Bonus: Check out the USDA or United States Department of Agriculture.  You may immediately think you don't qualify for a USDA grant, but many are surprised by how wide-ranging their grant programs are.  
• Nonprofit organizations: Nonprofits often provide grants to support businesses in specific industries or underserved communities. Most NFPs tend to offer “microgrants” or small grants that are targeted towards their mission.  However, for the right business, these can be invaluable to get off the ground. 
• Private business grants: Many private businesses offer grants to support small businesses in their sector or their neighborhoods.  These are generally harder to find, but many Fortune 500 companies will offer grant programs for startup businesses as part of their overall mission.   

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Access to capital is the lifeblood of any growing startup or small business. Having the correct capital stack and access to opportunities can go a long way to your ultimate success and ability to keep the lights on.  

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All businesses should explore grant opportunities even if they aren't in need of cash right now. Businesses change fast, and having a playbook for all funding opportunities available to you is a must.  

Here to support your growth

At Ramp, we're revolutionizing finance, yet we're only beginning. Our commitment is to continue providing substantial savings in both time and money, empowering our customers to expand. They all seek the same thing from Ramp: to operate their businesses with greater efficiency. We're here to accelerate their pursuit of their missions.

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Our confidence in our approach is reinforced by our customers' successes. They're leveraging smart, real-time data for better decision-making and focusing their teams on impactful projects by automating tedious tasks of little value.

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The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.