This is a guest post by Harinder Sandhu, founder and CEO of EmpowerRD
This guide looks at the full variety of government funding options for entrepreneurs, from the moment you build a business plan through to the later stages of growth. We’ll cover the year-round funding available to businesses (“Innovation Funding”), and the schemes that were created in response to the Coronavirus pandemic (“Coronavirus Funding”).
To help navigate this section we’ve split the funding options according to where in the innovation lifecycle they are most relevant. This moves from Ideation (i.e. research or business plan stage) to Product Development (e.g. building out the minimum viable product) to Commercialisation (i.e. attracting customers to your product).
While it’s more likely that a small startup will be involved in the Ideation and Product Development stage of innovation, that won’t exclusively be the case. Large businesses may undertake new innovation projects that mean they qualify for the earlier stages of funding, so be sure to consider the full variety of projects your business is currently undertaking to ensure you don’t miss out on any relevant funding.
Ideation Stage Funding
We recommend every founder identifies the local grants suitable for their business at the earliest stages of ideation. The vast majority of these are for early-stage companies, however, there are some awards for later-stage companies, e.g. the Northern Powerhouse Fund offers an equity finance option up to £2 million.
In total there are over a hundred and fifty different local grants available in the UK. They can be on a regional level (e.g. Midlands Engine Investment Fund), county level (e.g. Worcestershire Proof of Concept Fund), city level (e.g. Liverpool City Future Energy) or even on a borough level (e.g. Reigate and Banstead Business Support Grant). The amounts vary in size from approximately £500 to £2 million.
The awards will, of course, be dependent on your primary business address. In addition, the grants can sometimes be sector-specific (e.g. Creative England New Ideas Fund) or founder specific (e.g. Growing Graduate Enterprise Lincolnshire).
The government’s Regional Growth Fund list is the best places to get an exhaustive list of the local grants available.
Innovate UK Grants
Innovate UK deliver the UK’s flagship innovation grant scheme. It was designed to support innovation that is deemed too risky for the private sector to fund. So the grants are primarily aimed at companies currently conducting pre-commercialisation stage R&D e.g. research, prototyping, planning etc.
The majority of grants are linked to the current technological “challenges” agreed in concert with industry. The list of challenges can be found on the UKRI website. If you’re operating in a sector covered by one of these challenges then your business is more likely to succeed in attracting grant funding. Innovate UK also offers a smaller amount of sector-agnostic, so-called “Smart”, grants. These are more competitive, but can be found in the full list of grants on the government website.
The average grant size awarded is £270,000. The range can be from £25,000 to millions depending on the grant applied for. For some grants, you’ll need to create a consortium with another business.
The Knowledge Transfer Network is a government-funded body tasked with promoting the takeup of Innovate UK grants. We find that their grant listings are the easiest to navigate. Additionally, if you plan to apply for a grant then get in touch with their team as they will advise you on the best practices for your application.
EASME (EU Grants)
As part of the government’s withdrawal agreement, the UK committed to honouring all EU grants awarded while we were still a member of the European Union. How these grants will be delivered after the withdrawal is still being debated as part of the separation treaty, however, it is expected that either the UK will continue its involvement in the current EU grants framework, or the UK will replace that framework with another similar international set of grants which aim to foster cross-border innovation.
Grants are available for all sizes of businesses, including those at the earliest stages of ideation (such as business plan stage). For that reason, we recommend that all businesses speak to a government-funded delivery partner such as Newable to ensure that you’re not missing any EU grant funding suitable for your size or sector.
Product Development Stage Funding
R&D Tax Credits
This credit allows you to claim back up to 33% of the costs you’ve spent on R&D. For most early-stage businesses your R&D will relate to your product development. The most common costs associated with that development will be your engineering and product team salaries, as well as any materials needed in the development process.
The credit is awarded once the costs for R&D have already been incurred. In that respect, it’s different from a grant which pre-funds R&D. A claim for R&D Tax Credits needs to be submitted after you’ve closed your accounts for the year, as you’ll be claiming on your R&D costs for that financial year.
The government has made steps to make it easier to self-file for these credits, and we recommend if you’ve spent less than £50k on R&D in one financial year, that you pursue this route by consulting the government guidance on making a claim. Our Introduction to R&D Tax Credits will also be a good place to start understanding the scheme in more depth.
If you’ve spent more than £50k on R&D, then it makes sense to engage with a specialist to compile your claim. A specialist will help ensure that your claim is successful and that you aren’t missing out on any additional costs that you could be claiming for.
At EmpowerRD, we’ve updated the traditional process of making a claim. Our R&D claims experts work together with an intelligent online platform which significantly speeds up the process of making a claim. Our technical efficiencies also allow us to charge significantly lower fees than traditional advisors. Feel free to look over our website to understand more.
If you’re unsure how much you’ve spent on R&D then we recommend checking our guide to identifying your R&D costs.
R&D Tax Credit Advanced Funding
As discussed, R&D tax credit applications can only be submitted once the costs for R&D have been incurred throughout the financial year. Additionally, it can take up to 3 months to receive the credit after the claim submission. The average wait time we saw between claim submission and payment in 2019 was 42 days.
For that reason, many businesses will opt in to receive Advanced Funding secured against the award of their credit. This can either be delivered up to 9 months before the claim is submitted, or it can be issued at the point the claim is submitted (in advance of the funds being received).
At EmpowerRD, we offer both services. For post-claim submission funding, we offer a fixed 5% fee. That is our EmpowerRD Now service. For pre-claim submission funding, the interest rates will vary depending on the size of your claim, company circumstances and loan duration. Get in touch with one of our team to understand more.
R&D Capital Allowances
These are similar to R&D tax credits, but capital allowances allow for money back on assets which aid innovation, rather than staff and expendables. The most common example for software companies will be the cost of a bespoke internal IT system. More broadly, investment in a new plant or machinery for R&D would be eligible.
The scheme offers 100% tax relief on capital expenditure to fund innovation. Any UK business is eligible to apply. The commercial activity must meet the standard of innovation also required of R&D tax credits.
This is likely to be most relevant to your tech business once you’ve reached a certain scale and invest in internal IT systems. We recommend talking with a knowledgeable accountant about these.
Commercialisation Stage Funding
Innovate UK Loans
We feel that these are the most overlooked option for funding a tech company’s growth. Of course, equity financing allows access to new networks which can help your business in non-monetary ways, but the rates available for Innovate UK loans make these an interesting funding option without giving away equity.
The loans are explicitly developed to help with the commercialisation stage of developing new products. The loans deliver between £100,000 and £1 million, depending on your project requirements. They have a typical interest rate of 7.4% with a 5 to 10 year repayment schedule – significantly outperforming most bank-lending at the same growth stage. Only businesses with fewer than 250 employees can apply so it may well be a good alternative to raising a Seed or small Series A round.
This tax reduction is designed to reduce the costs of applying for a “qualifying IP right”, most typically, a patent. If granted, a company can apply a reduced corporation tax rate of 10% to worldwide profits arising from the invention.
In 2016, the government made changes to the scheme to close some loopholes. The downside of these changes is that Patent Box is now known for being an extremely complex form of tax relief. This is most significantly true when considering when to opt into the scheme. The relief is only applicable to the profit derived from the patented product, and this has a fixed time limit. If you opt into the scheme too early, then your early losses bringing the product to market may prevent you from benefiting from the reduced rate of corporation tax once you gain market traction.
Our general recommendation is that if you’re planning to patent your invention, then hire professional advice for this form of relief.
Coronavirus Response Funding
The government aimed its support for businesses at two key areas: funding the employees, and ensuring that businesses maintained liquidity.
While employee funding applies to businesses of all sizes, business funding schemes each target businesses of different sizes.
Coronavirus Job Retention Scheme
Often referred to as the “furlough scheme”, the Job Retention Scheme allows businesses to claim back a portion of the wages for employees they can no longer adequately employ. The amount you and your employees can get from the scheme will depend on when the claim was made. Originally 80% of the employees’ wages were paid by the government up to a £2,500 cap, but that has been reducing each month since August 2020.
There are some complications to the scheme: for example if your business receives partial public funding, or if your employees are contract workers. The scheme is only available if you’ve furloughed your employees before 30th June 2020, and made a claim for that period before 31st July 2020.
The scheme ends on 31st October 2020, with claims for that period needing to be submitted before 30th November 2020. Claims should be submitted online using Government gateway while including your PAYE details. For more information, the government’s own guide is the best resource.
Coronavirus Job Retention Bonus Scheme
The Bonus Scheme is an additional incentive available to employers for every furloughed employee that has remained under their employ until 31st January 2021. You will receive £1000 per employee, although this award is taxable.
Claims can be made from 15th February to 31st March 2021. The claim portal will be available online from 15th February 2021. There are additional criteria based on the minimum income for the employee and their employment status at the time of claiming. Again, the government’s guide to the scheme is the best resource.
Bounce Back Loans
Bounce Back Loans allow small businesses who have been adversely affected by coronavirus to receive a quickly administered government-backed loan from an accredited private lender. The government provides a 100% guarantee to the lender for the debt, although each borrower is required to enforce the repayment of the loans.
Loans are available up to £50,000, have a government-mandated interest rate of 2.5% per year and a 6 year repayment schedule. There is no personal guarantee required for the loan. To be eligible, you’ll need to demonstrate that your business has been adversely affected by the Coronavirus pandemic.
There is no company size restriction on the loan although the £50,000 maximum will mean it’s less appealing to larger businesses, especially as BBL claimants cannot apply to other coronavirus business funding schemes.
The BBL scheme is currently available until 30th November 2020. As the schedule and interest rate are mandated by the government, there won’t be a large variation between lenders, but we still recommend comparing the terms for a few of them. The British Business Bank (“BBB”) website has the full list of accredited lenders.
Coronavirus Business Interruption Loan Scheme “CBILS”
CBILS is the next tier of business funding available. CBILS loans are for businesses with turnover exceeding £250,000 and 3 years of trading history. You’ll need to demonstrate that your business has been adversely affected by the Coronavirus downturn.
Loans between £50,001 and £5 million are available. Loans above £250,000 typically require personal guarantees. Interest rates vary from 1.5% to 13% and the government pays the first year of interest repayments.
As with BBL, applications will be accepted until 30th November 2020, although the government is expected to announce an additional scheme or an extension in November. The CBILS scheme is administered through over 100 private sector partners, and the terms will vary significantly between them, so we strongly recommend shopping around before committing to a lender. Each lender has been accredited through BBB and the full list of lenders can be found on their website.
Launched in May, the Future Fund aims to help startups who have been unable to access the alternative loan schemes available. The UK government will match private investments in UK based or operating startups with a convertible loan up to a value of £5 million.
The government provides funding ranging from £125,000 to £5 million, subject to the same value being committed by private investors. This means that at least £250,000 in aggregate needs to be raised. You need to be a UK-based startup or an overseas startup that has participated in an accelerator (e.g. Y-Combinator), and who has a substantial UK economic presence.
In addition to these criteria, the company must have raised at least £250,000 in equity from private investors in previous funding rounds in the last five years. There are additional criteria viewable on the BBB website. Applications are currently open until 30 November.
Your lead investor will be the primary applicant for the Future Fund. The clearest step-by-step guide to making the application can be found on the Seedlegals website.
Coronavirus Large Business Interruption Loan Scheme “CLBILS”
CLBILS is a variant of the CBILS scheme which caters for businesses which have a group turnover greater than £45 million. As with the CBILS loan, the government gives the lender an 80% guarantee on the debt. Participants can borrow up to 25% of their turnover, up to a maximum of £200 million. Companies borrowing more than £50 million will have limits placed on their dividends and senior pay allocations.
To be eligible, the applicant’s businesses activities must be UK-based, must generate more than 50% of turnover from trading activity, and the applicant must have turnover of more than £45 million per year. Finance and insurance companies are not eligible.
The CLBILS application deadline has been extended to 30th November. As with CBILS, applicants should apply through an accredited private sector lender, and shop around to guarantee the terms most suited to your business. The BBB has the full list of lenders.
Coronavirus Credit Financing Facility “CCFF”
The CCFF allows the largest organisations to access liquidity. This scheme is administered by the Bank of England and is available to organisations with investment grade credit ratings. There is no publicly communicated limit to the amount you can receive from the CCFF, although so far recipients have received between £25 million and £1 billion.
The Bank of England has indicated that the last date on which commercial paper purchases will be made under the CCFF will be 22nd March 2021. The CCFF will be closed to new issuers from 31st December 2020.
Applications should be made through your corporate banking partner. The issuance itself will be delivered by the Bank of England. For more information we recommend checking the Allen & Overy summary of the scheme, and talking with your corporate banking partner.
About the author
Harinder Sandhu is the founder and CEO of EmpowerRD, which combines the expertise of ex-HMRC advisors with modern technology to deliver an improved R&D claims experience at a fraction of the cost of traditional advisors. Before founding EmpowerRD, Hari was Government Incentives sector lead at PwC. As a member of HMRC’s R&D Consultative Committee, Hari also advises the government on the best means to incentivise innovation in the economy. He has processed claims for companies ranging from early-stage startups to blue-chip multinationals like HP and RBS.
If you are interested in how EmpowerRD could help your business, please enquire here.