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Whether you’ve recently quit the day job and taken the self-employment plunge or you’re just throwing around some small business ideas, a big pinch point for start-ups in the UK is funding. Luckily entrepreneurship is something the government encourages, and there’s a range of both public and private funding options out there designed exactly for this purpose. But what are these funding options for new UK businesses? And how do you know which one is right for you?
At Myriad Associates we have almost two decades of experience in working with innovative new and established businesses across the country, so have put together a quick guide.
Loans are a popular option but can be very risky, making in-depth research vital. Most loans are offered either by banks or alternative loan providers and must be repaid in full as agreed. Lending criteria can be strict and many lenders require security.
Alternative loan sources include:
Many SMEs and start-ups actually use equity finance already. This is either because they’ve invested their own money into the business, or raised capital from family and friends who then have a stake in it.
Equity finance is an attractive option to get a business off the ground because unlike a loan there’s no interest and no repayments. However, investors aren’t guaranteed to get their money back, which is what makes equity investments risky for them. The investment isn’t held against any business assets and there’s no real comeback if the business fails.
So how do investors make money? The answer is either when the company is sold, or via share dividends once the company has grown and is doing well. However, the amount they will receive as a percentage can be higher to reflect the initial risk.
EIS is a UK Government-administered tax relief scheme to help encourage investment in new businesses. Investors themselves can then look forward to some lucrative capital gains and income tax reliefs. For businesses, EIS is beneficial in that it makes your company more attractive to other investors as it feels less risky.
Businesses using the EIS scheme can raise up to £5 million every year, and a maximum of £12 million across the lifetime of the company. You can find out more on the government's Enterprise Investment Scheme page.
Angel investors invest their own personal money into small businesses that they believe have the potential to grow and thrive. Having provided this equity finance, angel investors then typically take shares in the business.
The benefit of having an angel investor isn’t just financial though. They bring their own unique skills and ideas to the business, usually because they already have extensive experience in the relevant field. As well as the cash injection, angel investors usually have access to a wide variety of other professionals who can help grow the company too, giving the business owner access to a veritable wealth of networks, links and tips. Some angel investors are more active than others, and it may be an individual or a group.
There are several crowdfunding options for financing a start-up business in the UK, but the main two are reward crowdfunding and equity crowdfunding:
Reward crowdfunding is where an investor, or group of investors, contribute to a business in return for non-financial benefits. It’s a helpful way of funding innovative creative projects and is usually operated on a tiered system. This means that the more an investor donates to the fund, the more (non-cash) rewards they’ll receive. Such rewards could be things like free gifts or tickets. It’s an effective and inexpensive way of gaining relatively small amounts of money and represents little to no risk.
Equity crowdfunding allows for money to be invested in a business in return for shares, or a small stake in it. It’s often the ideal solution for companies in high-growth areas, where the potential for return is high.
Innovate UK offers the chance for a new companies to receive a substantial financial investment if their projects are likely to accelerate sector growth. Open to businesses in the UK specifically, the money can be used to test out the feasibility of your business longer term. It can also be used for developing new products, services or processes, or improving existing ones. This is done through research and development, or in collaborating with other business/research projects.
The amount of money offered ranges from £25,000 to £10,000,000 depending on the conditions laid out during each funding round. More can be found on the Innovate UK webpage of the Gov website.
Many start-ups aren’t aware that the research and development (R&D) Tax Credits scheme applies to them, or wrongly think that their work isn’t eligible. Some believe they’re too small, or are in the wrong sector, and others just find applying too daunting. But it’s a huge shame, as they could well be missing out on a much needed windfall. This is why it’s worth speaking to a team of R&D tax relief specialists like ourselves at Myriad Associates. No matter how small your company (or your claim), if you have engaged in any form of scientific or technological research lately then you could be due financial relief to help with the cost.
If your business is profitable then you can receive a reduction on your Corporation Tax liability, whilst loss-making companies can receive a cash lump sum. The relief is worth up to 33% of your R&D expenditure which is well worth having - can you afford to miss out?
This is just a very small sample of funding options and avenues you may wish to explore when it comes to financing your new start-up. It’s an ever-changing landscape, but with the right advice and a clear business growth strategy your start-up has the best chance of success.
Call Myriad Associates now on 0207 118 6045 for the most comprehensive tax advice around growing your business today. Also, please do take a look at our R&D Tax Credits and R&D Grants pages, or use our contact form so we can get back to you.