Companies of all types will at some stages of their existence need a financial injection beyond what is generated in revenue. Such funding falls into two broad categories: grants and loans. Each has its benefits and disadvantages so it is worth company owners looking closely at both to see which is the best match for their ambitions, whether that is moving to larger premises, buying equipment, green investment or research and development.
As a rule, grants tend not to be for working capital but are for specific projects or to achieve specific ends. They often require match funding to some degree and can amount to more than half of the sum required for the project.
In general they do not have to be repaid in full or at all and are awarded at the end of a competitive process, surviving to the end of which indicates you are on the right track with your project.
They tend to relate to central government objectives, such as achieving net zero targets, academic research or bringing about major scientific or medical advances that are intended to benefit the country as a whole. These objectives can have the effect of creating a new area of business activity that company owners might not have thought of or had the means to access.
The main Gov.uk website lists more than 80 types of grant available to private sector companies. Normally they are open to businesses and eligible organisations in any of the four nations of the UK. The sums available can be very substantial, running to many millions of pounds, particularly in are as such as reaching net zero, medical research or fundamental research that tackles big science questions.
Grants are usually intended to support a particular government policy, which may well have nothing to do with most companies’ purpose and activities.
They are often highly specialised and are far out of scope for most companies. For example, if you are a UK company interested in co-developing sustainable aquaculture systems in south-east Asia you could get your hands on up to £3million. Just don’t get trampled in the rush to apply. Or if the sky is not the limit for you, up to £500,000 is available to address skills gaps in the UK space sector.
Grant applications are time-consuming and most of them won’t succeed.
You will have to come up with some of the money yourself: it is unusual for a grant to cover 100% of a project’s costs; even 50% is good going and grants can amount to as little as 10% or 20% of the cost of a project.
Blue-sky thinkers need not apply
Often only late-stage projects are eligible. This is a reasonable way of increasing the efficiency of a granting body as the more early-stage projects it funds, the more flops it will have on its hands as the weaker ideas will be killed off during the development process.
This is bad news for start-ups, of course, which will have to find other sources of funding. Their lack of a financial track record is also an obstacle to their winning grant funding. A company that has not yet made an annual profit is going to be inherently more risky than one with a record of success, and grant-awarding bodies naturally want to ensure they are getting value for money from of the sums they dole out.
Grants usually come with strings that loans do not. A bank will simply want its principal repaid with interest and will not be concerned about your net zero ambitions, diversity and inclusion policies, whether you pay the real living wage, and other socially desirable corporate attributes.
There is a wide range of sources of borrowing, including the government-backed British Business Bank, the high street lenders, investment banks, peer-to-peer lending, community groups and non-profits and the private debt market. Usually the money is available upfront and can cover the whole cost of a project; however, interest will of course be payable on the loan – a big difference from a grant and even more so now that rates have returned to historically more normal levels. Interest rates are fixed so repayments can be budgeted for accurately.
Borrowing has far fewer strings attached than grants and repayment terms are flexible, enabling larger sums to be borrowed without impairing cash flow too much. Unlike grants you retain control of your business and some lenders provide a same-day service with loans.
State-funded loans and those from non-profits sometimes offer assistance with business development. For example, the government offers a Start Up Loan of £500 to £25,000. The money is an unsecured personal loan and is accompanied by help with writing your business plan and up to 12 months of free mentoring.
Often loans are unsecured so if you default won’t have to sell your house or your car; however, your credit rating will nosedive putting further loans out of reach for a while - or at best available only on unfavorable terms.
You are much freer to spend the money as you see fit, whether that is to buy new equipment or tools or vehicles, to invest in developing a new area of the business.
Companies that by their nature are ineligible for grants can get loans. The owner of a high street hairdresser or cafe, say, would struggle to find a grant to help expand the business yet, as long as the financials stack up, a loan should be no problem.
That said, some high street banks offer community business loans to charities and non-profits that are ineligible for mainstream funding. These are only available to organisations that have some sort of social purpose, and, for example, can provide funding for training new staff who have had difficulty accessing the labour market.
The main one of course is having to pay interest so companies running on very tight margins or with temporary cash flow troubles may struggles with repayments at times. Unsecured loans, which are obviously more desirable from the business owner’s point of view, will have a higher interest rate than secured ones.
Your company will have to undergo a credit check, which may affect your credit rating. You may have to pay fees if you are late with payments. A default on the loan will make further borrowing difficult and could, at worst, lead to court action against you.
The bank may say no. This is likely to happen just when you need the money most, say, after a bankruptcy or when in financial difficulties.
For most businesses a loan will make more sense than a grant. Ideally the extra revenue generated from the cash injection will more than pay the interest, and the funding will enable the business to grow more quickly without diluting ownership. In particular, businesses that have uneven but predictable revenues, say those in the tourist industry, will benefit from the ability to access funding when money is tight and pay it back in better times.
It can often be helpful to talk through what is right for your business with a financial professional, in particular to make sure any loans are affordable and will bring in the right amount of extra funding.
For advice on what is right for your business, please call the friendly team at Finsbury Robinson on 020 8858 4303 or email us at info@finsburyrobinson.co.uk
