Welcome to GrantTree’s all-in-one guide to startup funding in the UK.
Securing funding is one of the most challenging aspects of starting and scaling a business. And the eye-watering complexity of the UK’s startup funding landscape doesn’t make things any easier.
To help you navigate this complicated field, and acquire funding that makes sense for your business, we’ve prepared this easy-to-follow guide to the various financial options available to UK startups.
It covers crowdfunding, equity investment, corporate loans, and GrantTree’s own area of expertise: government funding.
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Contents
Friends, family, and fools
If you don’t have a strong track record of launching successful businesses, you probably won’t be able to secure funding from traditional investors or lenders right away.
If you don’t have enough personal capital to bootstrap your business yourself, your best route to startup funding could be your friends and family. In investment parlance, this group is usually referred to as ‘Friends, Family & Fools’.
Friends and family are often the first port of call for budding business leaders. Personal contacts are usually flexible when it comes to repayment and other terms. And they are normally willing to provide funding without the extensive background checks that would accompany a private loan or equity raise.
But raising money from close acquaintances is not without its pitfalls. Your personal relationships could easily be damaged if things don’t go to plan.
Without a good sense of your company’s valuation, which is difficult to calculate early on, you could also be surrendering away too much equity in your business.
And there’s the distinct possibility that if your business fails, your friends and family will still ask for the money back. This is something a professional investor, who understands the risk of startup investment, would never do.
If you’re interested in raising money from Friends, Family & Fools, check out this excellent resource from the Founders Institute.
Government funding
From R&D Tax Relief to Patent Box, Innovation Grants to Creative Industries Tax Reliefs, Britain’s government funding ecosystem is as vast and verdant as any other in the UK’s financial landscape.
Calling on more than a decade’s experience in the government funding space, we have broken down the various schemes that are available to innovative startups in the UK. We’ve also explained which companies qualify for each scheme and how much funding you can expect to receive.
If you want a better sense of which schemes are most suitable for your business right now, take a look at our Government Funding Timeline, which maps the schemes below against the different stages of startup and scaleup growth.
R&D Tax Credits
R&D Tax Credits are a generous scheme that rewards eligible companies with financial incentives for performing research and development.
Delivering more than £5 billion of funding a year, R&D Tax Relief works by reimbursing businesses up to 33% of their development costs like wages and subcontractor fees, as either a corporation tax reduction, a tax rebate, or a cash lump sum if they’re unprofitable.
R&D Tax Relief is available to businesses in various sectors, from food to fashion, manufacturing to medicine. All that matters is that your company is incorporated in the UK, is liable for UK corporation tax, and meets HMRC’s particular definition of ‘R&D’.
Do you qualify for R&D Tax Relief? Find out with our R&D Tax Relief Eligibility Quiz.
R&D Tax Relief is split into two sub-schemes: the SME R&D Tax Relief and the Research and Development expenditure credit (RDEC).
If you’re a startup, you should almost certainly apply for SME R&D Tax Relief. However, you may need to apply for RDEC if your company is linked to one or more larger businesses or has received another form of government funding.
You can find out which scheme your company should apply to here.
Innovation Grants
Innovation grants are designed to accelerate game-changing technological development by allowing innovative companies to convert ideas into concepts, concepts into prototypes, prototypes into commercial products.
Grant-worthy ideas can come from companies of any size, not just those that can shoulder millions in development work. Indeed, many innovation grant competitions have specific tracks for early-stage companies which award funding for technical feasibility studies and other foundational R&D.
Winning a grant early on in your business’s life gives you much more than money. A grant is the ultimate source of external validation—a statement from a discerning and informed source that your development work is technologically significant.
VCs and Angel investors tend to take notice of companies that have won an innovation grant. So, if you can win a grant early on, you should stand a far better chance of attracting investment. And doing so on highly favourable terms.
If you are looking for an innovation grant, the key is to keep an eye on what competitions are available from the main grant-awarding bodies like Innovate UK.
Be sure to check out Innovate UK’s Smart competition in particular. They are sector-agnostic and very popular among startups – though they are also very competitive.
Creative industries tax relief
Creative industry tax reliefs are designed specifically for companies working in artistic industries. There are eight kinds of creative tax relief in total, each serving a different field.
The specific reliefs are for:
- Video games
- Films
- High-end television
- Children’s television
- Animation television
- Theatrical productions
- Orchestral concerts
- Museum or gallery exhibitions
Creative industry reliefs work by refunding up to 20% of your eligible costs as a tax reduction or a cash lump sum.
If you are a video games studio or are developing AR or VR experiences, you may qualify for thousands of pounds in Video Games Tax Relief.
You can learn the basics of Video Games Tax Relief (VGTR) here.
The Patent Box
The Patent Box is a generous but underutilised scheme that allows companies to convert IP into a recurring relief on their corporation tax bill.
The scheme offers a valuable and often substantial source of additional capital for profitable companies. It also allows growing companies to do something they ordinarily struggle with: monetise their patents.
The Patent Box works by giving eligible companies a reduced tax rate on profits generated by patented technologies and concepts. So instead of the usual 19% corporation tax rate, you will pay just 10% tax on profits from product revenues, royalties, damages and related activities.
If you are ‘exploiting’ a patent and are liable for corporation tax in the UK, there’s a good chance your company will be eligible for the Patent Box scheme.
You can find a full list of eligibility criteria on the gov.uk website.
The Prince's Trust Enterprise Programme
The Prince’s Trust Enterprise Programme provides support to 18-to-30-year-olds looking to launch their own startup.
Offering a range of resources including business plan templates, marketing advice, and access to a network of financial backers, the Enterprise Programme has helped almost 90,000 budding entrepreneurs take their first steps into business ownership.
Crowdfunding
The popularity of Crowdfunding has skyrocketed in recent years.
According to Beauhurst’s Following the Crowd report more than 1,600 UK companies have raised money through crowdfunding over the last decade.
And thanks to the rise of intuitive platforms like Crowdcube, and a growing demand amongst retail investors for equity in promising UK startups, this trend is likely to continue for years to come.
Crowdfunding is worth exploring if you’re finding it difficult to acquire capital from more ‘traditional’ sources. But be warned that crowd-sourced finance is also a highly competitive space.
Standing out from the hundreds of other businesses raising money this way can be expensive. And even if you do invest in marketing and outreach, there’s no guarantee you’ll reach your funding goal, meaning you’ll have to start your campaign again from scratch.
It’s also important to note that companies rarely raise large amounts of money through crowdfunding. Successful projects on Kickstarter raise just $26,000 on average.
Still, Crowdfunding can be a helpful ingredient in your funding cocktail, allowing you to augment the other, more substantial funding sources explored in this guide.
Rewards-Based Crowdfunding
Rewards-based crowdfunding is where businesses offer consumers perks like discounts and exclusive merchandise in exchange for a small contribution towards their development costs. This kind or arrangement is what most people imagine when they think of crowdfunding.
Rewards-based campaigns can do much more than provide a cheap and non-dilutive source of investment capital; they are also an excellent and perhaps unique opportunity to galvanise a community of evangelical users. This support can really help you ramp up your marketing efforts when you launch your product.
The downside of rewards-based campaigns is that it can be difficult to lure enough investors to reach your funding goal. B2C crowdfunding is especially competitive, so you might decide the resources you’ll invest in marketing and outreach are better spent elsewhere.
For more information about completing a successful rewards-based crowdfunding campaign, take a look at this excellent guide from Republic.
Rewards-Based Crowdfunding Platforms
Equity Crowdfunding
Equity crowdfunding works much like rewards-based crowdfunding, only instead of product-related perks, you’re offering investors a small share in your business in return for their money.
One of the main advantages of equity crowdfunding is that it limits the risk borne by each individual, which makes it easier to convince investors to part with their money. Also, by securing a little capital from a large number of people, you can prevent any single shareholder from gaining real power over your company.
But equity crowdfunding also has some major drawbacks, including and most importantly, that you have to relinquish some amount of equity in your company. If you have shares in a growing business, you want to retain as much of that holding as possible. Equity gives you control, provides remuneration, and will hopefully convert into a lucrative payoff when it comes time to exit. The earlier you relinquish equity, the more you’ll be forfeiting in potential returns.
If you’re interested in learning more about Equity Crowdfunding, take a look at this excellent guide from investment platform Seedrs. And make sure you explore the popular platforms we’ve listed below.
Equity Crowdfunding platforms
Debt financing
Debt financing can be an excellent source of investment capital for your startup, not least because it lets you protect your equity in your business, a top priority for any entrepreneur.
Yes, debt funding can be expensive for startups. And some institutions flat out refuse to lend to early-stage businesses because they consider them too risky. But there are still several debt financing facilities that could provide the capital you need to reach your next stage of growth.
Here’s a breakdown of the main types of debt funding you should explore.
Startup Loans
The Startup Loans scheme is a state-backed initiative offering favourable rates to businesses less than two years old. Founders can borrow between £500 and £25,000 over a repayment term of up to 5 years, at a fixed interest rate of 6%.
Applying for a Startup Loan is free. All you need to do is complete a relatively simple online form and submit a business plan and cash flow statements. However, if you need a little extra guidance, the Startup Loans’ website has a library of helpful resources for preparing these documents.
Depending on how much startup capital you have, a Startup Loan can be a valuable source of relatively inexpensive debt financing. The rates are much more generous than those offered by high street banks and other private lenders. And unlike many traditional financial institutions, Startup Loans actually lend riskier startups money.
Advance Funding
GrantTree’s Advance Funding services combine all the benefits of government funding – generosity, accessibility, equity protection – with the speed of debt financing.
Through R&D Advance Funding, we can advance you as much as 80% of your R&D Tax Credit up to 12 months ahead of schedule. Thanks to the extra reassurance provided by our tax and grants delivery teams, our partners can offer you market-leading interest rates and other generous terms on your financing.
Meanwhile, our Innovation Grants Advance Funding offering lets you access the first six months worth of your grant windfall, helping you solve cashflow issues and accelerate key investments.
Peer-to-Peer Lending
Peer-to-peer lending is where companies source debt financing from a network of small lenders via an online platform like Funding Circle.
Sometimes referred to as debt crowdfunding, P2P lending carries all the same risks as regular corporate debt. But by swapping established institutions for a collection of smaller lenders and expensive go-betweens for an automated platform, peer-to-peer lending can make debt financing cheaper and more accessible for your startup.
Peer-to-Peer Lending Platforms
Convertible Loans
Convertible loans are a type of short-term debt that converts into equity at a later date.
A lesser-used form of financing, convertible loans incentivize lenders to finance high-risk companies with the prospect of a potentially lucrative shareholding.
The loan-to-equity conversion happens at an agreed time or moment called a ‘trigger’. Triggers are typically are set at the moment the loan recipient completes an equity fundraise over a certain size.
Convertible loans are easier and faster to secure than equity fundraising, which makes them a useful source of bridge funding. Also, you usually don’t have to pay interest on convertible loans because any interest accrued simply translates into additional equity.
However, as with other kinds of debt financing, the main disadvantage of convertible loans is that they have a high priority when they mature.
Unsecured Business Loans
Unsecured business loans do not rely on collateral for security. This makes them particularly useful for businesses that need cash but don’t have assets to leverage. Unsecured loans are also relatively quick to arrange and have flexible repayment terms.
The downside is that without the security of an asset, unsecured loans tend to be smaller—usually no more than £25,000.
Also, if your business is pre-revenue, your lender might ask you to provide a personal guarantee, meaning they can pursue your personal assets if your company doesn’t pay back the money.
For a list of unsecured business loans providers, check out this detailed resource from businessfinancing.co.uk.
Short-Term Business Loans
Short-term business loans let you borrow as much as £1,000,000 for up to 12 months.
There are various short-term business loans, including term loans, asset financing and invoicing, depending on what your company needs.
Short-term loans are beneficial if you want to bring forward a business-critical purchase or need to escape an immediate financial bind. However, these loans do come with relatively high interest rates; typically 5% to 10%. Also, they are generally unsecured, meaning you may need to provide a personal guarantee.
For more information about loan providers, take a look at money.co.uk’s analysis of the top 8 short term business loans on the market.
Business Line of Credit
A business line of credit is a pot of money your company can draw on as and when needed.
Unlike conventional loans, a business credit line only accrues interest on money you actually borrow rather than the whole lump sum. In that sense, a line of credit works a bit like a credit card.
On top of being a useful source of cash, you can use business credit lines as a kind of low-cost emergency cash reserve, protecting your startup against financial shocks or dips in company performance.
The size credit line you’ll have access to is usually tied to your company’s financial performance. This makes credit lines more suited to established, cash-generating companies.
If you’re looking for a business line of credit, make sure you peruse this comprehensive list of providers from smallbusinessprices.co.uk.
Venture Debt
Venture debt is a type of debt financing tailored to startups and other venture-backed growth companies.
Unlike other forms of financing, venture debt is not dependent on collateral or your company’s cash flow. Instead, lenders prioritise your ability to continue growing and raise additional investment capital, thereby enabling you to repay your loan.
In some cases, lenders will provide venture in exchange warrants, which lets them purchase equity in your business at a guaranteed price over a set period. As your company grows, these warrants increase in value, creating larger returns and a bigger incentive for venture debt lenders.
Venture debt could let you raise additional investment capital quickly and without significant dilution to your company’s equity. If you want to learn more about this form of financing, take a look at the range of detailed articles on Silicon Valley Bank’s website.
Equity funding
Equity funding is where private companies sell shares in their business to outside investors in exchange for investment capital.
For UK startups, this equity investment is generally provided by Angels; wealthy individuals who invest their own money, and Venture Capitalists; firms who leverage personal and institutional capital to purchase stakes in high-growth businesses.
While both Angels and VC firms invest in seed and venture-stage businesses, they are very different when it comes to how much they are willing to allocate, the level of due diligence they perform, and the kinds of companies they choose to back. We explore these differences between Angels and VCs in more detail below.
We also cover two government schemes – EIS and SEIS – that provide tax relief to investors that back early-stage companies. If you’re hoping to secure equity investment for your startup, applying to these schemes is a great way to sweeten the pot for investors.
For more advice on finding and securing Equity Funding generally, check out Crunchbase’s fantastic guide to raising capital for startups.
Angel Investors
Angel investors are wealthy individuals who invest in early-stage companies using their own money.
Angels practice a high-risk, high-reward investment strategy. They take large stakes in unproven seed and venture-stage businesses, hoping that one out of every ten or 20 investments delivers a substantial pay-off.
Angel investors’ affinity for risk makes them excellent partners for early-stage startups, as does the fact that many Angels are themselves former entrepreneurs, and therefore have a good understanding of what it takes to grow a successful business.
Some people believe the best way to find Angel investors is through personal and professional networks. It’s certainly true that leveraging a personal connection can help you stand apart from the countless other companies searching for funding. So, if you can’t reach Angel investors through your existing network, it might be time to join an established business community like London & Partners.
But tapping your network isn’t the only way to engage an Angel investor. Another effective and sometimes more efficient route is to reach out directly to Angel networks. Angel Networks are essentially communities of Angel investors that pool resources and investment opportunities, many of which have easy-to-use submission portals where you can pitch your business.
Here are some of the most active Angel networks in the country. You can also check out Beauhurst’s excellent list of the 23 most active Angel networks in the UK.
Venture Capital
Venture Capital firms are the largest providers of equity funding for early-stage businesses in the UK. While Angels tend to invest their own money, VCs source capital from a combination of wealthy individuals and financial institutions. VC firms also usually invest more money than Angel investors and prefer more mature companies with a more developed investment proposition.
While these points are generally true, Venture Capital firms vary significantly in terms of their typical investment size and the kinds of companies they’re looking to add to their portfolio. So before pitching a VC firm, you should make sure they’re a good fit for your company.
A good place to start would be looking at the other companies the firm has invested in recently and what industries and technologies the firm focuses on. Platforms like Crunchbase offer an easy way to find and filter VC firms based on the kind of investment partner you are looking for.
Even after narrowing your search, and utilising a sophisticated VC database like Crunchbase, you should still expect to pitch a lot of different firms before you find that will agree to participate in your fundraise.
SEIS
The SEIS – or Seed Enterprise Investment Scheme – helps early-stage startups secure their first tranches of outside investment. One of four widely popular venture capital schemes, the SEIS works by giving private investors a range of tax reliefs on cash used to buy shares in fledgling businesses. Investors must hold their shares for a minimum of three years to receive the full benefits of the scheme.
SEIS-qualifying companies can pocket up to £150,000 in investment – a significant sum in the first few years of business. SEIS eligibility is determined by how long your company has been trading for (under two years), how many employees you have (less than 25), your gross assets pre-money (under £200,000), and a few other criteria.
The tricky thing is, you won’t know whether your company qualifies for the SEIS until you’ve completed your funding round. This regrettable lack of visibility means investors don’t know whether they will receive tax benefits from the scheme until after they’ve put their money in.
Thankfully, HMRC has created a handy workaround to this problem: SEIS Advance Assurance.
SEIS Advance Assurance
Advance Assurance is a ‘semi-binding’ declaration from HMRC stating that your company will qualify for the Seed Enterprise Investment Scheme once you complete your fundraise. Practically speaking, Advance Assurance is a way for you to determine whether you and your investors will receive SEIS benefits before your fundraising starts, solving the visibility problem mentioned above.
Advance Assurance is extremely useful when you are trying to court investors. But keep in mind that it offers only a provisional indication, not a full-proof guarantee. HMRC has the right to bar your company from the SEIS or EIS scheme, even after it has granted you assurance. Also bear in mind that not all investors are eligible for SEIS. It’s not all down to your company.
To apply for SEIS Advance Assurance, you need to complete this online form and supply evidence about your financial situation and your fundraise. It’s all pretty straightforward, but it can take a while to gather the necessary documentation.
Remember, this is a chance to test your eligibility. So whatever you do, don’t dress up the information you provide. If anything, you want to undersell your eligibility. That way, if HMRC says you probably won’t be eligible for SEIS, you can make changes before the fundraise starts.
EIS
EIS stands for the Enterprise Investment Scheme. Like the SEIS, the EIS provides tax reliefs to investors who buy and hold shares in early-stage companies.
But while the SEIS is targeted at seed-stage startups, the Enterprise Investment Scheme is designed for more ‘established’ businesses.
This ‘design’ manifests as slightly lower levels of relief (30% income tax relief rather than 50%, for example), but a far higher ceiling for the amount of money that can be invested and received.
You can find a complete list of eligibility criteria on the EIS website.
EIS Advance Assurance
HMRC also offers Advance Assurance for the EIS scheme.
Like SEIS Advance Assurance, applying for EIS Advance Assurance is a simple matter of providing HMRC with information about your business and upcoming fundraise.
You can apply for Advance Assurance using this form.
Conclusion
That brings us to the end of GrantTree’s guide to the UK startup funding ecosystem. We hope you found it helpful!
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If you want to explore the funding options open to your company, just get in touch. Our experts would be happy to help.
