When Loans Beat Grants: Considering Flexible Financing in Uncertain Times

The question we hear most from municipal leaders and community developers is, "How can we get grant funding?" We are happy to assist with this (After completing our intake form!), but sometimes the smarter question is "Should we use a loan instead?" While grants may seem like the obvious choice—free money, after all—loans often provide the flexibility and control that can make or break a project's success. As federal funding sources become less predictable in the coming years, understanding when and how to leverage loan financing becomes even more critical for municipal leaders. 

In early October, the SWPA Municipal Project Hub held a webinar entitled, A Game-Changing Municipal Financing Option: Rural Water Financing Agency Programs which showcased a new loan product available to communities in Pennsylvania. During this webinar, the audience heard from Indiana Borough regarding their recent experience financing a solar project at their wastewater treatment plant, as well as Mike McCaig of Raymond James, who explained the benefits of this option.

Types of Loans Available to PA Municipalities

Municipalities undertake many different kinds of projects but the goal is typically the same; provide high quality services at an affordable cost, and, where possible, increase the tax base of the community. 

If a project is unable to be funded by grants, many different loan programs exist to allow municipalities to move forward. In Pennsylvania, communities with 12,000 people or less can access the Local Government Capital Project Loan Program to purchase equipment and facilitate the purchase, construction, renovation or rehabilitation of municipal facilities at an interest rate of 2%. 

The Pennsylvania Infrastructure Investment Authority, more commonly known as PENNVEST, provides low-interest loans and grants for water quality projects across the state. It funds improvements and construction for drinking water, storm water, and sewage systems at a very low interest rate of 1%. 

Additionally, Pennsylvania municipalities can access municipal bonds, which provides tax exempt financing for infrastructure projects like roads, schools, and airports.

When Loans Make Sense

When to consider a loan versus a grant? If your project meets one or more of the following criteria, it may be a better fit for a loan: 

• Revenue-Generating Infrastructure leads the list. Water and sewer systems, parking facilities, municipal broadband, and solar installations that reduce operating costs often don't qualify for grants precisely because they generate savings or revenue.

• Large-Scale Capital Improvements frequently require loan financing due to scope and scale. Major road reconstruction, bridge replacements, comprehensive facility upgrades, and water infrastructure projects like intake dam reconstruction often exceed typical grant amounts. 

• Projects With Key Limitations such as compressed timelines or the necessity of using specialized contractors. Grants have several layers of oversight when it comes to procurement - these help to ensure that public money is spent in a way that is fair and equitable. However, when projects have a number of specialized features, loan funds are often more flexible.

A New Loan Option 

Landing on the right loan program is not always easy, especially for smaller municipalities and mid-sized projects. During the Oct 1 webinar,  speaker and municipal finance experts Mike McCaig of Raymond James, explained, “For municipalities that have exhausted grant sources like PENNVEST, the traditional options—bond markets or local banks—don't always fit. Bond issues can be prohibitively expensive for smaller amounts, while bank loans often come with shorter terms (10-15 years) that strain municipal budgets.”

One option that municipalities can now turn to is the Rural Water Financing Agency (RWFA). Despite its name, RWFA provides fixed-rate financing to any Pennsylvania municipality, authority, or school district for virtually any capital project, with terms ranging from 1 to 30 years. The program pools multiple borrowers quarterly to achieve AA- credit ratings, offering competitive interest rates (currently around 4-4.75%) that most smaller municipalities couldn't access independently. With a simple two-page application process, no prepayment penalties after 10 years, and flexible repayment structures, RWFA fills the financing gap for municipalities that need longer amortization than banks typically offer or find bond issues too expensive for smaller projects.

Pennsylvania municipalities have already successfully used the RWFA program for diverse projects. The City of Aliquippa borrowed $2 million for a fire truck and capital projects over 20 years. The Borough and Municipal Water Authority of Midland financed water line improvements. These pioneers demonstrated that smaller municipalities can access sophisticated financing previously available only to larger, higher-rated communities.

The September 2025 pool included Indiana Borough’s loan for a $1.2 million solar panel installation project. In the webinar, Borough Manager Nicole Sipos explained that the borough had initially thought they would work with PennVest, but ultimately decided to apply with the RWFA. Their project of installing solar panels on their wastewater treatment plant was not a perfect fit with PennVest’s existing loan products, and while the group was willing to work with them, Indiana Borough was under a time crunch to take advantage of expiring solar tax credits. 

This strategic decision demonstrates several key advantages of loan financing that every municipal leader should understand—particularly as traditional grant sources face uncertainty.