Subsidies vs. Loans: Which Should You Use? How SMEs Can Successfully Raise Capital
“Should I use a subsidy or a loan?” This is a question I am often asked in the field. To conclude, these two have completely different “purposes.” By using them correctly, you can significantly expand your financing options.
The Fundamental Difference Between Subsidies and Loans
Subsidy: Money that does not need to be repaid. However, it comes with conditions and a screening process.
Loan: Money that must be repaid. However, the usage is relatively flexible.
By keeping this one point in mind, you can understand the basics of how to use them.
Characteristics of Subsidies
Pros
・No repayment required
・Allows for business investment even with limited personal funds
・Being selected serves as proof of “business credibility”
Cons
・There is a screening process, and selection is not guaranteed
・Usage is strictly defined
・Since it is a reimbursement, you need personal funds upfront
・Requires time and effort for application and reporting
Characteristics of Loans
Pros
・No selection screening; you can borrow if you meet the conditions
・Usage is relatively flexible
・You can obtain funds upfront (pre-payment)
・Amounts and terms can be set flexibly
Cons
・Obligation to repay
・Interest is incurred
・Increased debt affects financial status
How to Use Them Effectively
The correct approach is not to choose “one or the other,” but to use them in combination.
Pattern 1: Subsidy + Personal Funds
Use subsidies to reduce the out-of-pocket costs for large investments. If you can write a business plan that passes the screening, you can effectively make capital investments for less than half the cost.
Pattern 2: Loan + Subsidy
Since subsidies are paid after the fact, secure funds through a loan first to carry out the project. Once the subsidy is received, use it to repay the loan. This can solve cash flow issues.
Pattern 3: Loan Only
Use loans for urgent projects where you cannot afford the time for subsidy screening, or for expenses that do not qualify for subsidies.
How to Create a Financing Plan Using AI
By asking Claude or ChatGPT the following, you can get hints on the best combination for your company.
"My company is in the XX industry with XX employees. We are considering an investment of XX yen in XX. Please explain how to effectively combine subsidies and loans."
However, loan terms, interest rates, and screening criteria vary by financial institution. For specific loan consultations, please be sure to check with a financial institution or a Small and Medium Enterprise Management Consultant.
Loan systems that are easy for small and medium-sized enterprises to use
Here are some loan systems that are useful to know about in conjunction with subsidies.
・Japan Finance Corporation (JFC) loans: A policy-based financial institution operated by the government. Provides low-interest loans to small and medium-sized enterprises.
・Loans with Credit Guarantee Association backing: By having the Credit Guarantee Association act as a guarantor, it becomes easier to borrow from private banks.
・Local government institutional loans: Low-interest loans established independently by prefectures and municipalities.
Summary
Subsidies and loans are not mutually exclusive; they are meant to be used in combination. Reducing the investment burden with "money that doesn't need to be repaid (subsidies)" and stabilizing cash flow with "money that can be used upfront (loans)"—this two-pronged approach is the smart way for small and medium-sized enterprises to handle business investment.
Next time, we will publish "How to Correctly Read Public Offering Guidelines—Look Here to Understand the Keys to Selection."
Follow and like us so you don't miss it🦒
Please send questions or feedback via comments or X → @hojokin_support