Scalable Economics

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The Complete Guide to Government Funding For Startups

Hari Sandhu

Guest Contributor

Please note: The information contained in this article was updated on 4th November 2020. For the most recent version of this guide, head to the EmpowerRD website. Claimants should also consult the UK government's website for updates on individual schemes. For more information, please enquire at empowerrd.com/forward-partners.

This guide looks at all the government funding options available for startups, from incorporation through to the later stages of growth. 

We’ll cover the year-round funding available to innovative businesses (“Innovation Funding”), and the schemes designed to help businesses through the Coronavirus pandemic (“Coronavirus Funding”).

Innovation Funding

To make this section easier to navigate, we’ve organised the funding options according to their position in the innovation lifecycle. 

We’ll cover 3 stages

  1. Ideation: i.e. research or business plan stage 

  2. Product Development e.g. building out your MVP and

  3. Commercialisation i.e. growing your customer base or usage figures.

While it’s more likely that an early-stage business will benefit from the Ideation and Product Development stage funding, that isn’t exclusively the case. 

Large businesses often undertake new innovation projects that mean they qualify for the earlier stages of funding even if their core business is at late stages of Commercialisation

For that reason, it’s worth considering the full variety of activities your business is currently engaged in to ensure that you don’t miss out on any relevant funding.

 

  1. Ideation Stage Funding

Local Funding 

We recommend every founder identifies the local funding available to their business as soon as they’re incorporated. 

The vast majority of local funding is for early-stage businesses, but there are some awards for the growth phase, 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 or loans available in the UK. 

They can be 

The amounts vary in size from approximately £500 to £2 million. The awards will also depend primarily on your primary business address. 

In addition, the grants can sometimes be 

The government’s Regional Growth Fund list is the best place to get the complete list of local grants and loans available.

 

Innovate UK Grants

Innovate UK delivers the UK’s primary innovation grant scheme. 

It was established to fund innovation that the private sector considers too risky. So the grants are mostly aimed at companies engaged in Ideation stage R&D, for example: 

  • research, 

  • prototyping, 

  • planning etc.

The majority of grants are linked to the current technological “challenges” agreed in partnership 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, “Smart”, grants. These are more competitive, and can be found in the full list of grants on the government website.

The average size of the grant awarded in 2019 was £270,000 but can range from £25,000 to £millions depending on the grant you apply for. For some grants, you’ll need to apply in partnership with another business.

The Knowledge Transfer Network is a government-funded organisation which promotes the takeup of the Innovate UK grant scheme. 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 run a number of workshops and training sessions to help with your application.

 

 

EASME (EU Grants) 

As part of the government’s withdrawal agreement, the UK pledged to honour all EU grants awarded while we were a member of the European Union. How these grants will be delivered after Brexit is still being debated as part of the separation treaty, but it is expected that either 

  • the UK will continue to be involved with 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 or Business West to ensure that you’re not missing any EU grant funding suitable for your size or sector. 

 

  1. Product Development Stage Funding

R&D Tax Credits

You can use R&D Tax Credits to claim back up to 33% of the money you’ve spent on R&D. 

For most early-stage businesses, your R&D spend will relate to the development of  your first product. 

The most common costs associated with that development will be 

  • your engineering and product team salaries, 

  • any materials needed in the development process.

You’ll only be awarded the credit after you’ve spent money on R&D. (R&D credits are different to grants which are designed to pre-fund R&D). 

You need to submit a claim for R&D Tax Credits after you’ve closed your accounts for the year, as you’ll be claiming on your R&D costs for that prior financial year.

If you’ve spent less than £50,000 on R&D, we recommend you

 

If you’ve spent more than £50,000 on R&D, we recommend you 

  • Get a specialist to compile your claim. 

A specialist will help ensure that your claim is successful and that you're claiming against the maximum amount of costs that you’ve incurred. This can get quite tricky, especially as you grow. 

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. Have a look over our website to understand more about how we differ from the traditional method of submitting an application. 

If you’re finding it hard to understand whether you meet that £50,000 threshold then we recommend checking our guide to identifying your R&D costs.

 

 

R&D Tax Credit Advanced Funding

As discussed, you can only submit R&D tax credit applications once the costs for R&D have been incurred in the financial year. Additionally, it can take up to 3 months for you to receive the credit after you submit the claim to HMRC. In 2019, we saw an average wait-time of 42 days from submission to payment .

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 (“pre-submission funding”), or it can be issued at the point the claim is submitted (“post-submission funding”). 

At EmpowerRD we offer both services. 

  • For post-submission funding we offer a fixed 5% fee via our EmpowerRD Now service. 

  • For pre-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 you can use the R&D capital allowances scheme to claim back money on assets which aid innovation, rather than staff and expendables. The scheme offers 100% tax relief on capital expenditure which aids innovation. Any UK business is eligible to apply. The commercial activity must meet the government’s 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. Or if you’re developing hardware which requires upfront investment in production machinery. We recommend talking with a knowledgeable accountant about these.

 

  1. Commercialisation Stage Funding

Innovate UK Loans

We feel these loans are the most overlooked option for early-stage tech companies in the UK. 

Of course equity financing brings access to 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 diluting your equity.

Innovate UK loans

  • are explicitly developed to help with the commercialisation stage of developing new products. 

  • deliver between £100,000 and £1 million, depending on your project requirements. 

  • 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. 

  • Are only available to businesses with fewer than 250 employees so it may well be a good alternative to raising a Seed or small Series A round.

 

Patent Box 

This tax reduction is designed to reduce the significant costs associated with acquiring 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 it’s now renowned for being very complex to apply for and administer. 

This is most significantly the case when considering when to opt into the scheme. The relief is only applicable to the profit derived from the patented product, and it also 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 to see whether this form of relief will be suitable for your business, and when it should be activated.

 

Coronavirus Response Funding

The government aimed its support for businesses in two key areas: 

  1. funding the employees whose jobs were threatened, and 

  2. ensuring that businesses maintained liquidity.

While the employee funding applies to businesses of all sizes, the business funding schemes each target businesses of different sizes. We’ve sorted the business funding in descending order of business size.

 

  1. Employee Funding 

Coronavirus Job Retention Scheme

Often referred to as the “furlough scheme”, the Job Retention Scheme allows businesses to claim part of the wages of employees they can no longer adequately employ. These form the living expenses of those employees while they remain underemployed. 

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 first phase of 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.

The second phase of the scheme commenced on 31st October to coincide with the new national lockdown in England. The extended scheme returns to the 80% government subsidy of employees wages up to a cap of £2,500. 

 

 

Coronavirus Job Retention Bonus Scheme

The Bonus Scheme is available to employers who have kept furloughed employees on their payroll until 31st January 2021. The business 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 income the employee received and their employment status when the claim is made. 

Again, the government’s guide to the scheme is the best resource.

 

Job Support Scheme 

The JSS was designed to replace the Job Retention Scheme, adapting it to reflect the regional lockdown policy. There are two versions of the JSS scheme depending on whether your business is required to close as a result of local Coronavirus regulations (the JSS Closed Scheme) or whether it can remain open but is suffering from reduced demand (the JSS Open Scheme). Should we return to regional lockdowns it’s likely this scheme will be reintroduced.  

The Closed Scheme provides employees with two-thirds of their salaries up to a cap of £2,500. That income is paid entirely by the government with the employer not needing to contribute. 

The Open Scheme requires employees to work at least 20% of their hours at normal rates of pay. For the hours not worked, the employer is required to pay 4% of the typical salary and the government funds 49% of the remainder (up to a cap of £1,541.75). That means the employee will take home 73% of their salary while working 20% of their hours.

The scheme was due to start on 1st November and was applicable to any business so long as they had PAYE credentials. 

Lewis Silkin has a good FAQ for employers. The full government’s guidance on the scheme is fairly approachable and can be found here

 

  1. Business Funding

It’s important to note that opting into these business funding schemes will impact how much you can claim using the typical Innovation Funding options laid out above. This is especially the case with R&D tax credits. 

We’ve written a short guide on that subject which we recommend reading if you plan to apply for both Innovation and Coronavirus Funding.

 

Bounce Back Loans 

Bounce Back Loans are quickly administered government-backed loans 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. 

The maximum loan size is £50,000. The loans have a government-mandated interest rate of 2.5% per year and a 6-year repayment schedule. There is no personal guarantee required on the loan application. To be eligible, you’ll need to provide evidence that your business has been adversely affected by the Coronavirus downturn.

As BBL claimants cannot claim any of the other Coronavirus Business Funding schemes, the £50,000 limit means that this scheme is most suitable for small businesses.

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 in terms between lenders, but we still recommend comparing a few of them. The British Business Bank (“BBB”) website has the full list of lenders.

 

 

Coronavirus Business Interruption Loan Scheme “CBILS”

CBILS is the next level of business funding available. 

CBILS loans are for businesses with turnover exceeding £250,000 and 3 years of trading history. As with BBLs you’ll need to show that your business has been negatively 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 between 1.5% to 13% and the government covers the first year’s 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 be different for each, so you should do a thorough comparison of lenders before committing. Each lender has been certified through the BBB and the list of lenders can be found on their website.

 

Future Fund

Launched in May, the Future Fund aims to help startups who have been unable to access the alternative loan schemes available. This scheme is different from the others, in that it offers convertible loans, which means the government will be in a position to hold equity in a number of UK startups. 

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 total needs to be raised. You also 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 significant UK presence.

In addition to these criteria, the company must have raised at least £250,000 in equity from private investors in the last five years. There are additional criteria viewable on the BBB website. Applications are currently open until 30th November.

Your lead investor will need to make the application for the Future Fund. The clearest guide to submitting an application can be found on the Seedlegals website.

 

 

Coronavirus Large Business Interruption Loan Scheme “CLBILS”

CLBILS is a version of the CBILS scheme which caters for businesses which have a turnover greater than £45 million.

As with the CBILS loan, the loan is delivered via a private lender but the government gives the lender an 80% guarantee for the debt. Participants can borrow up to 25% of their turnover, up to a maximum of £200 million. Companies borrowing more than £50 million may have their dividend payments and senior pay rates restricted.

To be eligible, the applicant’s businesses activities must have a significant UK economic presence, must generate more than 50% of their turnover from trading activity, and the applicant must have an annual turnover greater than £45 million. Finance and insurance companies are not eligible.

The CLBILS application deadline has been extended to 30th November. As with CBILS, applicants need to apply through a certified private sector lender, and should shop around to find the terms most suitable for your business. The BBB has the complete list of lenders

 

Coronavirus Credit Financing Facility “CCFF”

The CCFF is designed for the largest private and public companies to access liquidity. The scheme is administered by the Bank of England and is primarily available to businesses with investment-grade credit ratings (although the Bank of England requests that businesses that fall slightly below this threshold get in contact). There is no publicly communicated limit to the amount you can receive from the CCFF, although so far loanees have received between £25 million to £1 billion.

The Bank of England has indicated that the last date on which loans will be made under the CCFF will be 22nd March 2021. The CCFF will no longer accept new applicants 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 Allen & Overy have a good summary of the scheme.

For more information: please enquire at empowerrd.com/forward-partners.

Please note: The information contained in this article was updated on 4th November 2020. For the most recent version of this guide, head to the EmpowerRD website. Claimants should also consult the UK government's website for updates on individual schemes.

 

Hari Sandhu

Guest Contributor

Harinda Sandhu is the founder and CEO of EmpowerRD, which combines the expertise of industry-leading claims 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.

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