Innovation in funding

HERE’S A QUESTION FOR YOU. What is it that all UK businesses, regardless of sector and location have in common? The answer – a need for funding.

20 September 2018

Crowdfunding

HERE’S A QUESTION FOR YOU. What is it that all UK businesses, regardless of sector and location have in common? The answer – a need for funding.

By Sandy Findlay - Partnership Director at ABGI UK

The period immediately following the crash of 2008 was a difficult time for innovative SMEs in the UK, as it was in most developed markets. However, the last few years have seen the flourishing of sources of funding supporting innovation.

The range of sources currently available means that it is now much easier for companies to secure adequate and appropriate funding from the start to finish of a project. However, management teams need to think more strategically about their funding requirements (how much, why and when they need it).

Early stage funding is obviously the most “risky” and as such traditionally was made up from a combination of boot strapping (internal resources) equity and grant funding.

Boot-strapping
In order to make a package attractive to external stakeholders (grant funders and equity investors) the owners/management team will normally be expected to demonstrate some commitment and belief in the project and making their funding request more credible, in the eyes of other investors.

Demonstrating some “skin in the game” by providing a proportion of the project funding from their own resources: be that retained capital in the business or additional funding through additional equity investment or directors’ loans, is always a good foundation for any funding package.

Grants
Generally grant funding is a valuable source at the start of an innovation project when it may be difficult to secure commercial backing as a consequence of the technical risks bring faced and the likelihood of potential failure.

The key would be finding the most appropriate source of grant to meet the project. State aid grants, such as Horizon 2020 or SMART and other higher value sources aimed at encouraging collaborative innovation activity amongst companies in the EU.

These tend to be focused on larger scale and more technically challenging projects. While de minimis funding (more often available through local business support programmes) provides smaller amounts of money, is more easily accessed (with less stringent application processes and quicker decision cycles) can help companies with smaller, less technically challenging projects.

The management team needs to weigh-up the amount of time involved in putting together a robust grant application with the likelihood of success. Many on the larger grant sources are competitive in nature and consequently, not every request will be successful.

Equity investment
The first task for the team will be to identify the equity investors with a specific interest in technology development projects (such as SEP, Mercia technologies, Northern Venture Managers) as opposed to those with a keener interest in market development funding proposals (typically the role taken by BGF ).

If the project is a bit less technically challenging and “near to market” companies can take advantage of Innovate UK Loans, which were launched toward the end of 2017 to bridge funding gaps in “near-to-market” projects.

This “fund of last resort” can provide an extremely flexible resource for management teams: with initial capital available for 3 years (with an additional 2-year extension if required) followed by up to 2 years repayment moratorium and finally up to a 5 year repayment period. Each of these options requiring justification by the lender the loan capital accruing interest (albeit at favourable rates) across the entirety of the loan period.

Some of the mainstream banks have been encouraged to dip their toes in the “innovation funding pool.” Most notably Barclays Bank is offering between £100,000 and £5million for innovative SMEs embarking on projects aiming at improved products, services or processes. This funding is flexible and can take the form or a term loan or a line of credit).

Not only is there a comprehensive suite of funding options covering the lifespan of an innovation project, innovation can be a source of on-going funding once the project is completed.

R&D tax relief  provides companies with a generous tax benefit based on their spend in previous accounting periods. Currently offering between 8% and 25% of R&D spend as a tax benefit (depending on which scheme a company is claiming through). The scheme can also offer cash credits, addressing short-term funding gaps, for companies willing to surrender their losses.  There are also a growing number of commercial finance providers offering R&D tax relief cash advances, offering companies short-term gap funding based on the value of benefit the company is expecting from HMRC, usually as a supplement to an existing commercial finance facility such as invoice finance.

Patent Box
For companies fortunate enough to have patents resulting from innovation projects Patent Box can offer much more attractive long-term funding benefits, giving companies access to a preferential corporation tax rate of 10% on ALL profits directly linked to the commercial exploitation of patents over the life of the patent (which can be up to 20 years).

This is just scratching the surface of where you can go with funding mechanisms for innovative businesses, to generate value and return from innovation.

These days businesses are no longer tied to restrictive bank loans or the desperate rates of asset based financing.

Now, by thinking outside the box, much like you might do with your company’s technology, the range of innovative funding sources available could make all the difference between failure to launch or reaching for the stars.

Speak to ABGI UK
Finding the right innovation funding mechanism can be complex and time consuming, but if you choose the most appropriate approach and advisor, it can be highly worth your time. But consider your options carefully.

You want the biggest return for the least possible effort, this means that you need a service provider that can minimise your time, risk and complexity but also maximise the accuracy and value of your application.

To arrange a free consultation to discuss your own R&D specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the ABGI team on: 0203 984 0321 or Live Chat with us.