Access UK Funding And Innovation Grants For Small Businesses | Breakthrough Funding

Thursday, June 21, 2018

Looking for innovation grants?

How to access UK funding and innovation grants for small business

  1. Government grants
  2. R&D tax relief
  3. Crowdfunding for small businesses
  4. Equity funding
  5. Loans and overdrafts
  6. Asset finance
  7. Invoice advances and factoring
  8. Angel investors
  9. Venture capitalists



  1. Government grants

There’s really only one place to go if you want a grant to fund innovation or development work; Innovate UK is the government organisation which showcases the latest innovation funding opportunities, gives advice and can connect you to innovation experts. They run grant ‘competitions’ which can cover 50% of your costs but they’re usually based around sector themes such as bio-tech, construction, manufacturing or agri. You’ll probably need their help to apply as the forms are lengthy and require a huge amount of detail on your project.

They also have a loan programme to cover research development such as producing plans, developing prototypes, experimental production and testing.

Horizon 2020 is the largest EU grant scheme for developing intellectual property including new food products. There are dozens of different schemes and so they too can be difficult to navigate. Ixion Holdings is a not-for-profit organisation and part of The Shaw Trust (a major charity). They have a network of advisers around the country, who can talk through what you are doing and then recommend the right grant for you. They help to fill out the necessary paperwork and have an impressive record of success. You can contact one of their advisers here.

Alternatively, you can apply for a local government grant. Every region will have its own grant programme with local advisers who can guide you through the process. Your local council website will have a section on supporting small businesses or visit the comprehensive Business is Great website. There are business support phone lines and lots of online advice on how to get varying types of funding, along with the grants that might be available in your area.



  1. R&D tax relief

R&D tax relief is a poor description for the government scheme that gets cash back for companies involved in innovation or development work. It’s undoubtedly the single biggest funding mechanism for those investing in innovative projects. To be eligible you need to be developing something new and different. This could be a food product where you’re grappling to remove allergens or use new ingredients, a different type of app or software, a new product or design developed for manufacturing or in an engineering process, innovation in growing techniques in farming or agri, advances in biotech, science, health products or remote monitoring of patients, you could even be self-funding an in-house CRM or management system because you can’t find what you want off the shelf – the list is endless.

You need to be a UK-based limited company and paying corporation tax or at the very least be eligible for it once you’ve gone past break even. What this means is that you can get this cash benefit even if you’re pre-revenue or are still loss-making. Why it’s called tax relief therefore, we’re not quite sure. The scheme works not as a grant in advance, but a part-reimbursement of money you’ve spent to fund an advance or development you’ve been working on. You have to reach your year end and prove what you’ve spent in order to access the cash.

A good explanation of the scheme can be seen at the Breakthrough Funding website and there’s a handy quiz and calculator to see if you’re eligible and what you might get back. HMRC statistics show that 22,000 small businesses received an average £61,500 last year. Why weren’t you one of them?


  1. Crowdfunding for small businesses

Crowdfunding is all the rage and there are many stories of start-ups who miraculously manage to raise six-figure sums, even though they’ve barely set up. But the truth is it’s often the exception rather than the rule. You can go for a loan on some of these websites (see below) where individuals are prepared to invest in you. But the interest rate is fixed depending on your risk profile. However, most businesses go onto crowdfunding sites to get funding in return for a share of their company. Generally, they give away from 5% to 25% of the company shares (equity). You need to be realistic. If you’re asking for £100,000 and only want to release 5% of the business and you haven’t got any sales yet, you’re unlikely to get the investment you want.

Crowdfunding requires a lot of preparation. You’ll need to get together a detailed business plan, profiles of the company owners and potential clients, market research information, price points and an analysis of the competition. They will ensure that any statements you make are fair, clear and not misleading and they will verify all factual claims before they allow you to go live. The good thing about crowdfunding platforms like Seedrs and CrowdCube is that they have a support team who can advise and help you to get the full amount. They also have a large body of subscribed individuals who are ready to invest in companies that launch on the site.

On Seedrs you will be expected to create a video to showcase the business and your team. This is a key selling tool which is initially used in a private launch to Seedrs registered investors and anyone in your own network. If this part of your campaign gets good traction i.e. a certain percentage of shares are bought, it then goes to a public campaign published on the main site open for 60 days. If you hit the target, due diligence is conducted and legal documentation is prepared. With Seedrs (and many of the other larger crowd funders), you only deal with them as the single shareholder and all the other investors are part of their shareholding. You don’t have to deal with each individual shareholder (there could be hundreds of them!) which makes communication and legal transactions much simpler.

The main crowdfunding sites charge a percentage of the total funds raised, usually around 6%. There will also be a payment processing fee (around 0.5%) and a fixed completion fee of £2,000 to £3,000.


  1. Equity funding

Equity funding (sometimes called private equity) is the term used to describe the process of raising money by selling shares in your company. This could be with family members, from crowdfunding (see above), a business angel or a more formal investment company. The advantage of giving equity to an experienced investor is that they can also sit on your board (likely to be a condition anyhow) and give valuable advice as you grow. They may also have a great network to help you with business development and raising your profile.

There are lots of different sorts of equity funding such as preference shares, convertible shares or warrants which are converted when the company is sold. There is also ‘sweat’ equity, where key individuals with skills you need, especially digital skills, work for your company without payment but for a percentage of shares instead.

A start-up with impressive growth will have several rounds of equity financing as it evolves. Such companies typically attract different types of investors at various stages of its evolution, so it may use different equity instruments for its financing needs at each stage. There are many different equity financing options and it’s very easy to get seduced into a deal with a highly experienced investor without really understanding what’s involved. It’s therefore critical to get legal advice before signing anything and make sure your solicitor explains every element, with both the benefits and disadvantages clearly defined. In addition, if you have funding from family and friends, or even if you have agreed sweat equity, you must get a shareholder’s agreement so everyone involved knows where they stand should the company succeed and grow, get bought out or fail.


  1. Loans and overdrafts 

You can go through the formal route and talk to your bank or access a loan online. The good thing about a loan is that you don’t have to give away a part of your business, but they can prove costly.

The high street banks will be ultra-cautious and it’s a fact of life that they’ll take weeks if not months to come to a decision. They usually expect some form of security against a tangible asset such as a property. The process will be pretty tortuous and interest rates may not be the best available either. However, if you want to keep your bank on side, for instance you might have an overdraft facility with them and a business mortgage, it could be worth having a loan with them too; it might make them more amenable if your business faces difficult cash flow problems later.

An overdraft facility, is really just another form of loan. Again, your bank will expect security against an asset and interest rates will apply, but this could be useful for short term cash flow issues.

Online lenders will be much quicker in giving a decision and practically everything will be done online. You might be able to get a loan without personal security, but the loan repayment rates will be very high in comparison. Basically, the lender will weigh up the risk – if you look like a stable business that will survive and thrive in the next couple of years, you will get a better rate. If they think what you’re doing is fairly risky and you haven’t got much of a track record, that will be reflected in the terms of the loan. Try Lending Crowd, Funding Circle or Zopa which matches individuals who want to loan money to small businesses, or try a company like LDF who specialise in short term loans for things such as forthcoming corporate tax or VAT payments or expansion funding. If you’re a start-up visit the government’s Start Up Loans platform.


  1. Asset finance

Asset finance refers to funding for assets that you already own or for those that you are intending to lease or buy.

You can gain finance against the assets you already own, such as machines, equipment or vehicles; this is generally called asset refinancing. This works just like a loan as described above, with the item itself being used as security. If you want to get funding for additional or new assets there is a wide choice of lenders. Tying up cash and paying for an asset up front could cause cash flow problems, and in many cases, you might not have the working capital to make the purchase outright. In this situation you could choose leasing, hire purchase or contract hire.

For equipment leasing the lender buys the asset you need and rents it to you over a period. At the end of the initial contract you can either continue leasing, buy it outright at an agreed price, upgrade or simply return it. A finance or capital lease tends to be over a longer-term that is designed for most, or practically all, of the asset's life. In essence, you get full use of that asset, paying for it as you go along but you don't technically own it, so it doesn’t appear on your balance sheet.

An operating lease or contract hire is a rental agreement with a set term. Depending on the item, maintenance is normally undertaken by the lease company too. Again, the asset will not appear on your balance sheet.

Hire purchase is a payment programme where you purchase the asset, spreading the cost over time. You pay in instalments and usually you'll be responsible for maintenance if applicable, but you will have full ownership when your payments have finished.

There are a huge number of organisations that offer leasing or hire purchase with varying terms and conditions. Shop around and haggle to get the best deal.


  1. Invoice advances and factoring

Unless your business is direct to the consumer where they pay immediately, most businesses issue an invoice with payment terms from 30 to 90 days. There is therefore a funding gap between when you sold your product or delivered your service and payment. This gap is one of the main reasons why small businesses fail even if they have a full order book and lots of customers. The late payment of invoices can cause significant cash flow problems.

Invoice factoring allows companies to sell their invoices to a factoring company in exchange for immediate cash. In the process, ownership of the invoices transfers to them. There are different financing options, but most will want a percentage of the invoice as a fee (usually from 2% to 4% above the bank base rate) and will give (say) 80% of the invoice value with the remainder at a later date when the client has paid. Please note however, that if you have a bad debt (i.e. the client defaults and doesn’t pay or goes into liquidation) you will still owe the factoring company. Your bank will be able to offer factoring services, but if you want a quick answer and want to operate your invoice factoring efficiently online check out Market Invoice. They’re backed by the government’s British Business Bank and you can opt to pay a percentage as you go or use their services as a fixed monthly fee.


  1. Angel investors

Angel investors are usually individuals who invest their own money in small growing businesses or start-ups. They will expect a percentage of your business which might give them a share of the profits annually (dividends), but they are more likely to hope for an increased value in their shares which can be realised when the company is sold. Look for an angel investor that can also give good advice and help connect you to a useful business network which ordinarily you would not be able to access.

It’s important to get your solicitor involved before signing anything and get advice on how much equity is fair given the offer price. A shareholder’s agreement is essential which includes what happens if you fall out with each other! The UK Angel Investment Network connects angel investors to entrepreneurs looking for funding.


  1. Venture capitalists

An individual venture capitalist is no different from a business angel. They like to invest in a strong management team, a large potential market and a unique product or service with a strong competitive advantage. They will be looking for high growth and will have an investment timeframe in mind.

A venture capital company is a group of wealthy individuals, insurance companies, pension funds and others who pool their money together into a fund. All partners have part ownership over the fund, but it is the venture capital (VC) firm that controls where the fund is invested, usually into businesses or ventures that most banks or capital markets would consider too risky for investment.

If you are dealing with a VC company you are going to be negotiating with people who have most likely worked in this area for their whole career. They will know what they’re doing so you need to get the best advice. The British Private Equity and Venture Capital Association oversees the industry, so make sure that whoever you deal with is a member.


Sue Nelson

CEO and Founder of Breakthrough Funding

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