Grants do not require repayment; in essence they are gifts of money. They are the
cheapest forms of finance although they usually include strict conditions on how the
money can be spent and the time frame in which it can be spent. Grants may come
from multilateral or bilateral donors, charitable foundations, corporations or
individuals (see Chapter 5). Grants are usually provided as a one-off payment to
help launch a new project or enterprise. They can play a very important role ‘buying
down capital’ or covering some or all of the initial costs of capital investment which
would be difficult to recoup from revenues. Funding agencies can be willing to
provide a grant that will help establish a financially sustainable operation such as
this but are generally unwilling to continue providing grants when they believe
operations can be sustained by selling a product or service profitably.
Table 6: Advantages and disadvantages of different types of finance.
Adapted from Ashden Awards. 38
Type of
Finance
Grant
Equity
Debt
Advantages for enterprise
• No need to repay
• The risk is shared with the
investor
• Payback is more flexible than
debt
• Investor more likely to be
active and supportive
• Easy to arrange compared to
equity – especially with a
good track record
• Retain complete control and
ownership
Disadvantages for enterprise
• Grant sizes are typically quite small, and
donor procedures cumbersome, meaning
lots of time can be spent chasing small
amounts of money
• Donors have a limited appetite for
continued funding of the same activity –
requiring innovative ideas or other funders
• Investors require high returns – equity can
be difficult to obtain and expensive
• Negotiation and due diligence processes
are time consuming
• Some control and ownership is
relinquished to the investor
• Difficult to obtain without a good track
record or collateral
• Repayment schedules are typically
inflexible
• Can be difficult to obtain for start-up
enterprises
Equity is the money invested in an enterprise by investors (including founders) with
the expectation of getting a future return. An equity investor will exchange money
for shares; effectively owning a percentage of the company. If the enterprise is
successful the shares will return a dividend payment to the equity investor from the
profits. Risk is shared with the equity investor; if the enterprise becomes bankrupt,
the equity investor can only take a share of the assets remaining after other
creditors have been paid. Equity is more flexible than debt since the repayments
are linked to operating profits. Investors are therefore more likely to be active in
providing support to the enterprise.
Renewable Energy to Reduce Poverty in Africa
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