A grant, a preferential loan and reimbursement of costs are different forms of support, which differ above all in the way the investment is financed, the timing of the payment of funds, the obligation to repay and the impact on the company's financial liquidity.
- A grant most often means non-repayable funding of part of the project costs, provided that the investment is properly implemented and settled.
- A preferential loan is repayable financing, but granted on more favourable terms than a standard commercial loan.
- Reimbursement of costs means that the business first incurs the expense from its own funds or external financing and only after it has been approved receives a refund of part of the costs incurred.
The same project may look attractive in terms of the amount of funding, but be difficult to implement if the company does not secure the funds for its own contribution, bridge financing, VAT, ineligible costs or expenditure incurred before the reimbursement is paid.
Why does the form of support matter for a company?
For a business, what matters most is not only whether a given programme offers funding. It is also important how the funds will be paid out, what obligations will arise for the beneficiary and what financial risks need to be taken into account before submitting an application.
The form of support affects, among other things:
- the level of own funds needed to start the project,
- the need to use a bank loan, leasing, a loan or working capital,
- the moment when part of the expenditure incurred is recovered,
- the scope of documents required for settlement,
- the risk of financial corrections and repayment of funds,
- the way the project is included in the company's financial plan,
- the real profitability of the investment after taking financing costs into account.
Programme documentation often uses terms such as “grant”, “funding”, “State aid”, “reimbursement”, “advance payment”, “financial instrument” or “preferential loan”. These terms are not synonymous. That is why, before choosing a programme, it is worth checking not only the maximum level of support, but also the mechanism for paying out the funds and the settlement rules.
Information on current forms of support for businesses can be checked in official public sources, such as the European Funds Portal, which presents examples of opportunities to finance investment, research, development and innovation, including grants and preferential loans.
What is a grant?
A grant is a form of non-repayable financial support awarded for the implementation of a specific project. In practice, this means that a business can receive public funds for part of the investment costs, provided that it meets the programme requirements, signs the agreement, implements the project correctly and settles it.
A grant is not “free money” in the everyday sense. The funds are non-repayable only if the beneficiary implements the project in accordance with the agreement, budget, schedule, call rules, rules on the eligibility of expenditure and the relevant legislation. A breach of the conditions may result in refusal of reimbursement, a reduction of funding or an obligation to repay part or all of the funds.
The main features of a grant
A grant can be recognised by several basic elements:
- it is awarded for a specific project, not for any needs of the company,
- it covers only specific eligible costs,
- it requires an own contribution from the business,
- it usually requires an application to be submitted and to pass a formal and substantive assessment,
- it is settled on the basis of documents confirming the implementation of the project,
- it may be paid out as reimbursement, an advance payment or a mixed system,
- it entails obligations concerning project durability, audits and the archiving of documents.
The most common mistake is equating a grant with an immediate payment of funds before the investment begins. In many programmes, the business must first incur the expenditure and only later receives reimbursement. In other programmes, advance payments are possible, but they usually require additional conditions to be met, a payment claim to be submitted and the funds spent to be settled later.
What is a preferential loan?
A preferential loan is a repayable form of financing. This means that the business receives funds to carry out the investment but is obliged to repay them. The difference compared with a standard bank loan is that a preferential loan may have more favourable terms, for example a lower interest rate, no commission, a longer repayment period, a grace period for capital repayment or the possibility of partial write-off in certain cases.
Bank Gospodarstwa Krajowego states that various financial instruments operate under the European Funds, including loans for business development, energy efficiency, renewable energy sources, innovation or other purposes depending on the programme and region. Details of such instruments are published, among other places, on the website BGK – European Funds.
When can a preferential loan be advantageous?
A preferential loan may be attractive especially when a company is planning an investment but cannot or does not want to wait for a grant call. It may also be a good solution when the project does not meet the criteria for a non-repayable grant but meets the requirements of a loan instrument.
In practice, a preferential loan may work well for financing expenditure such as:
- the purchase of machinery and equipment,
- purchase of fixed assets,
- investments in energy efficiency,
- renewable energy (RES) installations,
- digitalisation and automation of processes,
- development of the company's infrastructure,
- implementation of new services or products,
- financing investments that need to be implemented quickly.
The main advantage of a preferential loan is often access to cheaper capital. However, the main limitation remains the obligation to repay. Therefore, before submitting an application, you need to check whether the project will generate sufficient economic benefits to service the liability.
What is reimbursement of costs?
Reimbursement of costs is a method of paying out support, not always a separate programme. In practice, it means that the business first incurs the expense, pays the invoice, makes the purchase or receives the service, and then submits a payment claim together with documents confirming that the cost was incurred. Only after the documents have been verified does the institution pay out the funds.
PARP indicates that a payment claim may be used, among other things, to obtain reimbursement of costs incurred or to obtain an advance payment towards expenditure. The scope of the required documents depends on the call rules, the grant agreement and the guidelines applicable to the given programme.
What does reimbursement mean for financial liquidity?
Reimbursement is advantageous because it allows part of the expenditure incurred to be recovered. At the same time, it requires the company to finance the investment in advance. This is the key difference compared with financing paid out upfront.
Example: if a company plans to purchase a machine for PLN 500,000 net and the funding level is 50%, it can theoretically recover PLN 250,000. However, before receiving the reimbursement, it must secure funds to pay for the purchase, VAT, any ineligible costs and to maintain liquidity until the payment claim is settled.
In practice, this means bridge financing has to be planned. This may be equity, a working capital loan, an investment loan, leasing, a shareholder loan or another source of financing compliant with the programme rules.
Grant vs reimbursement – what is the difference?
Grants and reimbursement are often confused, because many grants are paid out precisely in the form of reimbursement. The difference is that a grant defines the nature of the support, i.e. that the funds may be non-repayable. Reimbursement, on the other hand, defines the technical method of paying out the funds, i.e. the return of part of the expenditure after it has been incurred and approved.
Put simply:
- a grant answers the question: are the funds non-repayable,
- reimbursement answers the question: when and on what basis will the funds be paid out,
- an advance payment answers the question: can part of the funds be received before the expenditure is incurred,
- a preferential loan answers the question: will the financing have to be repaid.
That is why, in practice, you may come across a grant paid out as reimbursement, a grant paid out as an advance payment or a grant settled partly through advance payments and partly through reimbursement. Each programme may have its own rules.
Preferential loan vs grant – which to choose?
There is no single answer as to which form of support is better. The choice depends on the type of project, the company's financial situation, the timing of the investment, the available calls and the ability to service liabilities.
- A grant is usually most attractive when the company can wait for a call, the project fits the programme criteria and the business is ready to meet the formal and settlement obligations. It is a financially advantageous solution, but often more demanding in procedural terms.
- A preferential loan may be better when the investment needs to be launched more quickly, the company needs repayable capital on favourable terms or the project does not qualify for non-repayable funding. In such a case, an analysis of profitability and repayment capacity is key.
- Reimbursement of costs requires particular attention in terms of liquidity. Even a high level of funding does not solve the problem of financing expenditure before the funds are paid out.
How to assess which form of support suits the project?
Before choosing a programme, it is worth carrying out a brief analysis of eligibility and financing. You should not start solely with the question: “how much can I get?”. A more practical question is: “is the company able to implement and settle the project correctly under the given financing mechanism?”.
In the analysis, it is worth checking:
- what the purpose of the investment is,
- whether the project fits current calls,
- whether the company meets the eligibility criteria for applicants,
- what costs may be eligible,
- whether an own contribution is required,
- whether the support will be paid out as reimbursement, an advance payment or a loan,
- whether the company has funds for bridge financing,
- whether VAT will be an eligible cost,
- what collateral may be required,
- what obligations will arise after signing the agreement,
- whether the project will be subject to audits or a durability obligation.
Such an analysis can be carried out independently using the call documentation, or you can use the funding analysis and selection service. In projects where liquidity and repayment capacity are key, it may also be helpful to use financial analyses.
The most common mistakes when choosing a form of support
In practice, many problems arise even before the application is submitted. Business owners focus on the maximum amount of funding and pay too little attention to the mechanism for paying out the funds and the obligations after signing the agreement.
The most common mistakes are:
- assuming that the grant will be paid out immediately after the agreement is signed,
- no funds to finance expenditure before reimbursement,
- failing to include VAT in the liquidity budget,
- overlooking ineligible costs,
- choosing a programme solely on the basis of the level of funding,
- no analysis of the ability to repay a preferential loan,
- starting the investment before the date permitted in the call rules,
- incorrect documentation of supplier selection,
- failing to take into account the time needed to assess the application and settle payments,
- confusing grants with reimbursement of costs.
the European Funds Portal indicates that, when implementing a project, the rules set out in the agreement and the documentation must be observed, and that improper implementation may result in the need to repay part of the support. This applies, among other things, to the rules on purchasing, eligibility of expenditure and project settlement.
Example of practical application
A manufacturing company is planning to purchase a new production line. If a grant call for production investments is available, the business can apply for non-repayable funding. However, it must check whether the project meets the criteria concerning innovativeness, efficiency, location, State aid and cost eligibility.
If the company needs financing more quickly and does not want to wait for a grant call, it may consider a preferential loan. In that case, the most important factors will be the interest rate, the repayment period, the required collateral and the ability to generate revenue after the investment.
If the grant is paid out as reimbursement, the business must first finance the purchase and only later recover part of the costs. Even a positive funding decision does not eliminate the need to secure bridge financing.
How to check available grants, loans and reimbursements?
The best starting point is to define the basic parameters of the project. You will need, among other things, company data, the investment location, the sector, SME status, the scope of expenditure, the project value, the planned implementation date and the sources of financing for the own contribution.
Next, it is worth checking whether there are current or planned programmes covering the given type of investment. For this purpose, you can use the free grant search engine with an AI Assistant, which covers calls from all over Poland and international EU calls.
In more complex projects, information about a call alone is not enough. An analysis of the call rules, selection criteria, eligible costs, State aid limits, environmental requirements, contractor selection rules and the payment schedule may be necessary. The full scope of support is described in grant advisory services.
Not sure which form of support will be best for your planned investment? Get in touch – we will analyse your project in terms of available grants, loans and financing models.Contact an expert
Author: Dariusz Kozakiewicz
EU funding expert