Long-Term External Sources of Finance (Other): Government Grants (1/2)

External sources of finance come from outside the business. Government grants belong to external sources of finance. When businesses need to use the money in the long term (more than five years), this creates the need for long-term finance.

The amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively low value such as vehicles will be small. While the amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively high value such as new machinery for the assembly line will be large.

Sources of Finance – Classification

1. Government grants

A grant is money given to the eligible business by the government for a specific purpose.

Government grants are non-repayable funds. It means that this ‘financial gift’ from the authorities is a complimentary finance that does not need to be repaid in the future.

The purpose of government grants

There are many reasons why governments give away grants.

For start-ups. The main purpose of government grants is to provide assistance to people to encourage them to establish new businesses.
To help underdeveloped areas. Many governments around the world offer grants to help stimulate economic activity in certain underdeveloped areas. Businesses expanding into developing regions of the country can also receive support.
To lower high unemployment. Grants can be issued to help industries facing particular problems such as high unemployment.
For business growth. Also, the governments try to support small businesses to help with business growth and assist in development.

Are there any drawbacks of government grants?

A big drawback of government grants is that they might be hard to obtain. Any business wishing to apply for a grant needs to write a time-consuming and convincing proposal. As competition for limited number of grants is fierce, having a creative idea may not be enough.

Grants also often come as a one-off payment with strings attached – conditions and restrictions. For example, a new business which received the grant is obliged to operate for a certain amount of time, must be registered in a specific location or hire a certain number of workers. If these conditions are not met, the grant may need to be repaid.