Securing Funding for Your Business in the UK : The Ultimate Guide

Obtaining capital is usually the most important factor in every business venture since it provides the necessary driving force to turn entrepreneurial ideas into reality. Navigating the numerous funding sources in the ever-changing UK business ecosystem can be difficult but essential to success. Seeking financial support necessitates a thorough comprehension of available options and strategic methods, ranging from conventional bank loans to innovative venture capital.

We at Incorp have created this comprehensive guide to assist you in taking the next step because we understand how challenging the UK startup scene can be for early-stage companies. Our goal is to provide both beginners and experienced business owners with the skills and understanding required to successfully negotiate the environment and obtain the resources required for expansion and success.

Different Types of Funding Options for UK Businesses

Here are some funding option.

1. Government Funding

A project or business that receives all or part of its funding from the government is referred to as having government funding.

• R&D Tax Credits

The government offers R&D tax credits as a way to encourage UK businesses to engage in innovation. With the help of this tax benefit, you can recover up to 33% of your R&D expenses. Typical expenses that can be recovered include engineering fees, product team pay, and materials used during the development phase. After the R&D expenses are incurred, the R&D tax reduction is granted. As you’ll be claiming on your R&D costs for the previous financial year, an R&D Tax Credit claim must be made after you’ve closed your books for the year.

If your company has spent more than £50,000, working with an expert who offers consulting services in conjunction with a platform can guarantee that your claim is maximized and that an HMRC investigation is avoided. Otherwise, you could file for yourself.

• Innovate Grants

The largest innovation funding program in the UK is provided by Innovate UK. This award program was created by the government to support innovative ideas that the private sector deems excessively risky. It is primarily intended for businesses that are involved in ideation stage R&D, such as research and prototyping. Most grants are related to the present technological “challenges” that have been agreed upon in collaboration with business. A limited number of competitive “Smart” grants that are sector-agnostic are also available from Innovate UK.

One government-funded organization that encourages participation in the Innovate UK funding system is the Knowledge Transfer Network. Their grants listings are the most user-friendly. It’s worth getting in touch with their team if you want to apply for a grant because they host a number of workshops to assist you with your application.

• Innovate UK Loans

The commercialization stage of the invention is the specific goal of Innovate UK funding, and only companies with less than 250 people are eligible. They can deliver anything from £100,000 to £1 million, depending on what you need. They greatly exceed most bank loans at the same stage of business growth, with a typical interest rate of 7.4% and a 5–10-year repayment schedule. It’s an intriguing path for expansion without giving up equity given the loan rates.

• EU Funded Grants

The UK participates in the Horizon Europe grant program, which provides projects around the EU with €95 billion in funding for innovation. The European Innovation Council and SMEs Executive Agency (EISMEA) is the most important organization for entrepreneurs in the United Kingdom. This funding is provided to SMEs by them, either alone or in partnership with other organizations. Additionally, EISMEA provides funds associated with particular objectives, including affordable housing or steady debt collection.

A list of suggested connections maintained by the government can assist organizations in gaining access to the Horizon Europe program.

2. Future Fund: Breakthrough

Through this program, investors can purchase shares of equity in innovative enterprises. It is managed by British Patient Capital, a British Business Bank affiliate. The application will be made by the primary investor, not the company. Businesses seeking to raise extra capital from the private sector and looking for investors to join the round can take advantage of this plan. High-value Series B+ firms are most suited for funding, given the minimum round size required is £30 million.

3. Patent Box

The goal of this tax reduction is to lower the high expense of acquiring a “qualifying IP right,” which is usually a patent. If approved, a company could apply a 10% global corporation tax rate to earnings generated by the invention. The program is renowned for being difficult to run and apply for.

This is particularly true when deciding when to sign up for the program. Because of the time limit on profits from each patented product, if you choose to participate in the scheme while incurring losses to launch the product, you might not be able to make enough money once you start making a profit.

If you intend to file for a patent on your product, it’s advisable to work with a knowledgeable tax expert to determine eligibility and the ideal time to activate it.

4. Government Venture Schemes

Two of the many UK government incentives that promote innovation are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). This section will cover the application process, requirements for obtaining assurance, and the operation of these two comparable government venture schemes.

• SEIS

With an emphasis on very early-stage companies, SEIS is meant to assist them in obtaining their first round of outside funding. By providing tax breaks, it enables private investors to purchase additional shares of your business. Individual investors who retain their shares for a minimum of three years will also be free from capital gains tax.

A maximum of £150,000 could be awarded through SEIS, which can be quite beneficial for companies. Companies that are eligible to use the plan, according to HMRC, must:

• Have completed a new qualifying trade.
• Have a UK-based establishment.
• At the time of the share issue, not being engaged in trading on a recognized stock exchange.
• Not currently have plans to go public or become a subsidiary of another.
• Hold no authority over any other business unless it is a qualifying subsidiary.
• Since the day of your company’s incorporation, you have not been under the management of another business.
• Not be a partner in a partnership;
• Not have earned more than £200,000 since the shares were issued.
• Employ fewer than 25 people full-time.

EIS

EIS is similar to SEIS, but EIS focuses on more established businesses, usually medium-sized startups, and allows individual investors to invest up to £1 million per tax year and receive a 30% tax break annually. Individual investors will also receive capital gains tax exemption after holding onto their shares for a minimum of three years.

EIS allows your company to raise up to £5 million annually and a maximum of £12 million in its lifetime—which includes any amount from other venture capital schemes—EIS allows for investment through the business as long as it is within seven years of its first commercial sale.

With a few exceptions related to gross assets and personnel size limitations, eligibility for EIS is comparable to those of SEIS. This includes

• Before any shares are issued, the company’s gross assets cannot exceed £15 million, and they cannot exceed £16 million right away after that.
• Having fewer than 250 full-time equivalent workers when the shares are distributed.

SEIS and EIS Advance Assurance

The majority of investors will want an assurance in advance that you qualify for investment through SEIS or EIS. Before you begin to present investors with SEIS or EIS investment options, you must submit an application to HMRC in order to accomplish this. You will need a number of items to apply, the most crucial of which are as follows:

The details of at least one proposed investor

• A business plan
• A cover letter;
• A copy of your most recent accounts;
• A three-year financial future prospects;
  

5. Equity Financing

Selling a portion of your company to outside investors in exchange for a monetary investment is known as equity financing or equity funding. Equity finance does not need a payback obligation, in contrast to debt financing. Rather, investors purchase stock in your company in order to profit from dividends or the sale of their shares.

The two most well-known providers of this kind of equity investment are venture capitalists (VCs), who raise money from VCs and affluent individuals to acquire holdings in high-growth companies, and angel investors, who are wealthy individuals who invest their own money. As seed and venture-stage investors, angels and VCs fund enterprises of a comparable scale. There are variations in their investment amounts, companies they select to invest in, and the procedures they use for conducting due diligence. Here, we examine these differences.

• Angel Investors

Rich people known as “angel” or “seed” investors provide capital and usually target early-stage (seed and venture) startups in order to support their expansion. An angel investor will receive financial support in exchange for an equity position in your business, which entitles them to a portion of your company—typically a sizable portion.

Angel investors are usually risk-takers, and their financial gains aren’t guaranteed. Their hope is that you will become a tremendous success and that their share value will increase exponentially. They can share their experiences and assist you along the road because they have always built their established, successful companies from the ground up.

How do you find angel investors?

Personal and professional networks: Networking both personally and professionally can help you locate angel investors. Making connections and building relationships will help you stand out from the competitors.

Existing business community: You can meet and build connections with possible angel investors in a number of established company communities.

Angel Networks: Communities of Angels that pool their resources and investment opportunities are known as angel networks. The networks are user-friendly and usually ask you to submit through a portal after making a business presentation.

• Venture Capital

Early-stage businesses in the UK usually get stock from venture capitalist companies, or VCs. In return for shares in your company, they invest money in startups. Unlike angel investors, which invest their own cash, venture capitalists (VCs) raise capital from institutional investors such as insurance companies, foundations, pension funds, and university endowments. Additionally, VCs tend to make bigger investments than Angel investors and will take a chance on a more established company.

In most cases, a venture capitalist will invest alongside other investors and VCs in a small minority of your company. Businesses will raise capital through series A, B, C, and so on, with new or current venture capitalists investing.

It’s a good idea to investigate whether the VC firm will support your company before making a pitch. Their company portfolios and sizes differ from one another. Use a site like Crunchbase to learn more about venture capital firms. It lets you search for and narrow down VCs according to your criteria. You should anticipate submitting pitches to multiple venture capital firms because the world of pitching to VC companies is highly competitive.

5. Debt Financing

Many small and medium-sized companies would rather sell shares to raise funds rather than take out a loan. Even though debt financing can first seem pricey, it typically offers low-cost business growth options and allows you to safeguard your equity. We’ve compiled a list of some of the most widely used debt financing strategies for your review.

• Venture Debt

Venture debt is a category of debt financing that startups and early-stage businesses can get. It can be offered by banks as well as non-bank lenders. Venture capitalists usually offer it as an extra service to equity funding.

Additionally, venture capitalists usually offer it as a supplement to equity funding. Like other debt financing techniques, it stops further dilution of stock shares. It is also independent of the cash flow of your business or collateral. Rather, the capacity for future business expansion and the ability to secure further funding are given top priority by lenders.

Given the high-risk nature of venture debt, it is not uncommon for lenders to be compensated with the company’s warrants on common equity. If your company expands, the warrant’s value will increase and the lender will benefit greatly.

• R&D Advance Funding

You can borrow money against your future R&D tax credits in order to expedite the receipt of funding. “R&D Advance Funding” is the term used to describe this. Before you begin the claiming procedure, the advance can be applied to a future tax credit claim, or it can be used as a loan at the moment the claim is made (thereby avoiding the HMRC wait period).

Since you can get funds up to six months prior to the end of the year, when you must file your R&D claim, this kind of debt financing is a great choice for the majority of enterprises. Your future R&D tax credit might theoretically be paid up to nine months ahead of time because it can take HMRC up to three months to release tax credit payments following an application. You will need to use the money you receive from your relief to repay the loan once you have received your HMRC credits.

Apply from the Government website here.

1. Bank Loans

Startups with steady cash flow are the ideal candidates for bank loans since banks prefer to see money coming in and going out. Obtaining a bank loan is quite unlikely if you are not yet profitable. There are two categories of bank loans: secured and unsecured business loans.

i. Unsecured business loan:

This loan does not demand collateral in the form of priceless company assets. This kind of financing is advantageous for new businesses that require capital but lack collateral. Unsecured loans are usually easy to get and have flexible repayment periods. Unsecured loans from lenders typically go up to £100,000, and in certain cases, much higher sums. Trade history becomes more significant in the absence of security, and the lender might want a personal guarantee.

ii. Secured business loan:

This loan is backed by the valuable assets that your company owns. The drawback of a secured loan is that, in the event that you are unable to repay the loan, the lender may liquidate your assets to recover their losses.

The assets could include machinery, a car, or a warehouse, among other items. Because there is less risk involved, secured loans are typically less expensive than unsecured ones. The amount you borrow depends on your available resources. You can borrow more money if you have greater assets.

6. Crowdfunding

If you’re trying to raise money for your small business, crowdfunding is a fantastic option that has been extremely popular in the last few years. To achieve your financial goal by multiple small amounts instead of one large one, it entails asking a huge number of individuals to each loan a tiny sum of money.

Take a look below to find out more about the two forms of crowdfunding:

1. Equity crowdfunding
2. and Reward-Based crowdfunding.

1. Equity Crowdfunding

Your company can raise funds through equity crowdfunding, which is often referred to as investment crowdfunding. In exchange for investment, equity crowdfunding often allows a large number of investors access to your company’s stocks. In proportion to their contribution, each investor is entitled to a share in your business. Equity crowdfunding is not the same as reward-based crowdfunding since it offers financial assets—like stocks and bonds—instead of rewards—like products or services. This makes equity crowdfunding a more traditional approach of obtaining cash.

Although it resembles traditional capital-raising techniques more than other crowdfunding platforms, its methodology differs greatly from the capital- raising approach. Equity crowdfunding seeks to raise money for your company from a far larger pool of investors than a select group of experienced investors. The goal is to raise the necessary capital by getting many investors to make little contributions.

Equity crowdfunding takes place on specialized sites such as;

Kickstarter

• Crowdcube
• Seedrs
• Syndicate Room

Advantages of Equity Crowdfunding

1. Minimal risk for investors: Since they are just contributing a little, the danger is minimal. This greatly facilitates your ability to persuade people to give up their money.
2. Investors without power: Equity crowdfunding entails offering modest shares of your company to a large number of investors and as such, no investor has the ability to acquire total control.

Disadvantages of Equity Crowdfunding

1. Lose equity in your company: You will ultimately obtain a lower potential return the more equity you give up early in the process.
2. Ownership dilution: The founders run the danger of losing some of their ownership stake in the business when they sell stock to several investors.
3. Investor expectations: Companies that use crowdfunding may have high expectations for returns, which puts pressure on the business to earn a profit rapidly.

Rewards-Based Crowdfunding

Rewards-based crowdfunding compensates your business development expenses with products or services. People identify this fundraising form with crowd funding because it is the most prevalent. This approach allows you to test the viability of your idea, raise money through a crowdfunding campaign, and develop brand advocates in the process.

That being said, rewards-based campaigns such as these can be very competitive, as such, it may be worthwhile to explore an alternative route and focus your marketing efforts on something else that offers more potential benefits.

Rewards-Based Crowdfunding Platforms

• Kickstarter
• Indiegogo
• Patreon

7. Friends, Family and Fools

The process of raising capital or funds for a company from close friends, relatives, and occasionally those who are prepared to participate despite the considerable risk involved is known as the “friends, family, and fools” funding process.

In the United Kingdom, this procedure usually entails presenting your business concept to individuals in your personal network who could be prepared to offer financial assistance, usually in the first phases when conventional funding sources like banks or venture capitalists are reluctant to invest.

This strategy is very dependent on interpersonal connections and trust because investors frequently support the entrepreneur more than the company.

One advantage of this type of finance is that repayment terms are typically flexible because of the relationship with a friend or relative. Additionally, they typically offer financing without doing a thorough background investigation. But borrowing money from friends or relatives can cause problems in your relationship. If things don’t work out nicely, it can easily result in a great deal of suffering. Another possibility is that you give up too much equity too soon without fully understanding the worth of your company.

8. Bootstrapping

Even though there are many opportunities for startup finance, many early-stage enterprises still opt for bootstrapping. Using your own funds to start a company from the ground up is known as bootstrapping. You oversee the daily operations of your company’s finances and don’t depend on outside investment or venture funds. It’s only you, and the only sources of funding for your business development are your sales, savings, monthly salary from a day job, credit cards, and personal loans.

Advantages of Bootstrapping Your Business

1. You are in charge: You are in total control of the decisions you make and the direction you choose to take your company. External decision-makers and influencers have a stake in your business as soon as you secure money. Furthermore, there are no debt repayment obligations or requirements to give up equity.
2. You possess versatility: Maybe now is not the right time for your company to be looking for funding. You can reach a point where you’re ready to look for outside help and funding by using a bootstrapping strategy. You will be given favourable consideration if you approach a venture capitalist with a bootstrapped, operational, revenue-generating business.
3. Find your feet: You could learn from your mistakes and risks in the absence of outside influence.

Disadvantages of Bootstrapping Your Business

1. As wonderful as it is to have liberty and control, bootstrapping a business is a labour-intensive process that demands blood, sweat, and tears. To fund your company, you will always have to use savings or take on a second job, which will require you to work irregular hours without assistance.
2. Lack of Experience: Support and assistance can be obtained through startup funding. Knowledge and experience from investors who have been through similar experiences as you can be obtained. Bootstrapping your business deprives you of experienced investors that could make your business a very successful.
3. Reduce Growth: Startup funding is usually chosen by early-stage businesses because it enables them to scale up quickly and provides them with the capital they need to expand at the required rate. Personal savings are usually insufficient, which keeps you from obtaining the crucial financial runway required to produce your business’s cash flow.

Final Thoughts

In conclusion, it should be noted that navigating the UK’s business funding ecosystem calls for plan, diligence, and adaptation. There are many choices available to businesses to consider, ranging from conventional bank loans to cutting-edge crowdfunding platforms. Entrepreneurs can obtain the capital required to take their enterprises to new heights by comprehending the particular requirements of their companies, making the most of the resources at their disposal, and cultivating deep connections within the financial world.

Incorpuk ‘s dedication to quality guarantees that every client, regardless of size, receives individualised attention and practical solutions. Put your trust in us to help your company reach its full potential and prepare it for success in the fast-paced UK market. Kindly contact us here to learn more.