Guide to startup funding in the UK

Finding startup funding can be a challenge when you’re starting your business and looking to grow. There are many different funding options to choose from, and navigating your way around UK startup funding can seem overwhelming.

Here at EmpowerRD, we know how complex the UK startup landscape can be for early-stage businesses; that’s why we’ve put together this bite-sized guide to help you make your next move.

This guide covers every viable funding option for early-stage companies and provides helpful advice and valuable resources. You might be looking for government funding, equity financing, debt financing, crowdfunding, funding from family and friends, or perhaps you’re considering going it alone and growing your business from the ground up.

What is Government Funding?

Government funding refers to an arrangement whereby a project or enterprise receives part or all of its financial support from a government. 

R&D Tax Credits

R&D tax credits are a government incentive designed to reward UK companies for investing in innovation. This tax relief allows you to claim back up to 33% of the money you’ve spent on R&D, with common claimable costs including engineering, product team salaries, and materials needed in the development process.

The R&D tax relief is awarded after the R&D costs have been incurred. A claim for R&D Tax Credits needs to be submitted after you’ve closed your accounts for the year, as you’ll be claiming on your R&D costs for that prior financial year.

For businesses that have spent over £50,000, engaging with a specialist incorporating advisory services with a platform will ensure you submit a maximised claim that avoids an HMRC enquiry. Otherwise, you should self-file. 

Have a read of our introduction to R&D tax credits guide for more information.

Innovate Grants

Innovate UK delivers the UK’s largest innovation grant scheme. The government established this grant scheme to fund innovation that the private sector considers too risky and is mainly aimed at companies engaged in ideation stage R&D, e.g. research, prototyping etc. Most of the grants link to the current technological “challenges” agreed together with industry. Innovate UK also offers a small quantity of competitive sector-agnostic, “Smart”, grants.

The Knowledge Transfer Network is a government-funded organisation that promotes the takeup of the Innovate UK grant scheme. Their grant listings are the easiest to navigate. If you plan to apply for a grant, it’s worth contacting their team as they run several workshops to help with your application.

Innovate UK Loans

Innovate UK loans are explicitly aimed at helping with the commercialisation stage of innovation; only businesses with fewer than 250 employees are eligible. They deliver between £100,000 and £1million, depending on your requirements. They have a typical interest rate of 7.4% with a 5-10 year repayment schedule – significantly outperforming most bank-lending at the same stage of business growth. The rates available for loans make it an interesting route for growth without giving away equity.

EU Funded Grants

The UK is involved in the Horizon Europe grants framework, which delivers €95billion of innovation funding to projects across the EU. The most interesting organisation for UK startups is the European Innovation Council and SMEs Executive Agency (EISMEA). They offer grant funding to SMEs, either as a standalone organisation or as a consortium with other organisations. EISMEA also offers grants linked to specific missions, such as stable debt collection or affordable housing. 

The government has a list of recommended contacts to help organisations access the Horizon Europe scheme. 

To find out more, read our article on the UK’s participation in the Horizon Europe Grants. 

Future Fund: Breakthrough

This scheme invests in innovative companies for a share of the equity. It’s administered by a subsidiary of the British Business Bank, British Patient Capital. The lead investor will make the application, not the business. 

This scheme is available to businesses raising a funding round from the private sector and looking for an additional investor to enter the round. The round size needs to be at least £30million, so this is most suitable for high-value Series B+ companies. The best place to find out more in our short guide to the scheme.

Patent Box

This tax reduction is designed to reduce the high costs of obtaining a “qualifying IP right” – most typically a patent. If granted, a company can apply a reduced corporation tax rate of 10% to worldwide profits arising from the invention. 

The scheme is known as being complex to apply for and administer. This is especially the case when considering when to opt into the scheme. Due to the fixed time limit applied to profits derived from the individual patented product, opting into the scheme while earning losses to bring the product to market may prevent you from gaining sufficient reward once you gain traction. If you’re planning to lodge a patent for your product, it’s in your best interest to hire an informed tax advisor to identify suitability and when it should be activated.

To find out more about government funding, read our extensive guide.

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two of numerous UK government incentives that support innovation. This section will focus on how these two similar government venture schemes work, how you can apply for them and the assurance you’ll need to obtain.

SEIS

SEIS is focused on very early-stage businesses and is designed to help them secure their first bit of outside investment. It offers private investors tax reliefs so they can buy new shares in your company. Individual investors will also receive capital gains tax exemption after holding onto their shares for a minimum of three years.

Through SEIS, you could receive a maximum of £150,000, which can be a real help for startups. HMRC has stated that the companies that can use the scheme must:

• Have carried out a new qualifying trade.
• Be established in the UK.
• Not be trading on a recognised stock exchange at the time of the share issue.
• Not have arrangements to become a quoted company or a subsidiary of one.
• Not control another company unless they are a qualifying subsidiary.
• Not have been controlled by another company since the date of your company being incorporated.
• Not have grossed over £200,000 when the shares were issued
• Not be a member of a partnership.
• Have less than 25 full-time employees in total when the shares are issued.

Read here to find out everything you need to know more about the SEIS Scheme.

EIS

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

Through SEIS, your company can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This total of £12 m also includes any amount from other venture capital schemes. Your business can receive investment through EIS as long as you are within 7 years of your first commercial sale.

Eligibility for EIS is similar to the SEIS, with a few differences in gross assets and staff size requirements. The company must:

• Not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards.
• Have less than 250 full-time equivalent employees at the time the shares are issued.

Read here if you need to know more about the EIS Scheme.

SEIS and EIS Advance Assurance

Most investors will need advance assurance that you are eligible for SEIS or EIS funding. To do this, you will need to apply to HMRC before you start to offer up SEIS or EIS investment opportunities to investors.

To apply, you will need a range of different things, these being the most important:

• The details of at least one proposed investor
• A business plan
• A 3-year financial forecast
• A copy of your latest accounts
• A cover letter

You can find a list of everything you’ll need to apply for advance assurance here.

Equity financing or equity funding involves selling a share in your business to outside investors in return for a cash investment.

Unlike debt financing, equity funding doesn’t require a repayment commitment. Instead, investors buy shares in your company to make money through dividends or by selling their shares. Investors only make a profit if your business is booming, so it’s in their interest to help manage and support your company’s growth.

The two most prominent providers of this type of equity investment are Angel Investors, wealthy individuals who invest their own money, and Venture Capitalists (VCs), who source capital from wealthy individuals and financial institutions to buy stakes in high-growth businesses.

Whilst the Angels and VCs invest in similar sized businesses (seed and venture-stage). There are some differences in how much they invest, their due diligence process, and the types of companies they choose to invest in. We explore these differences below.

Angel Investors

Angel or seed investors are wealthy individuals who invest money, and often time, in startup businesses (seed and venture-stage) to help them grow.

In return for their investment, an angel investor will take an equity position in your company: meaning that they take a share of your business, often taking a significant stake. Angel investors tend to be risk-takers, and their investments don’t always pay off. Their aim is that you’ll go on to be a huge success, thus exponentially increasing the value of their share.

It’s often the case that they’ve grown their established successful business from the ground up, so they can share experiences and help you along the way.

How do you find angel investors?

• Personal and professional networks: Building personal and professional connections is an excellent way to find angel investors. Establishing contacts and relationships will set you apart from the competition.
• Established business community: There are many established business communities where you can meet and connect with potential angels.
• Angel Networks: Angel networks are communities of Angels that combine their resources and investment opportunities. The networks are easy to use and often require you to pitch your business and submit through a portal.

Venture Capital

Venture Capitalist firms (VCs) are the most common equity provider for the UK’s early-stage businesses. They invest capital in startups in exchange for equity in your business. 

Instead of investing their own money like Angels, VCs raise money through institutional investors like pension funds, foundations, university endowments, insurance companies, etc. VCs also tend to invest more money than Angel investors and will usually punt for a more mature business.

A Venture Capitalist will generally take a small minority in your business, alongside other VCs and investors. Companies will raise money in rounds – Series A, B, C etc., and existing VCs or new ones will invest. Before pitching, it’s worth doing your research to see if the VC firm will work for your company. They vary in terms of business portfolio and size.

To research Venture Capitalist firms, you can use a platform like Crunchbase. It allows you to find and filter VCs based on what you are looking for. Pitching to Venture Capitalists is a very competitive landscape, and you should expect to be pitching to numerous VC firms.

Many small to medium-sized businesses are cautious of debt financing, preferring to sell equity to acquire capital.

However, as much as debt financing can seem expensive at first, it enables you to protect your equity, and it’s often a low-cost way of growing your business.

We’ve put together a few of the most popular methods of debt financing for you to look over.

Venture Debt

Venture debt is a type of debt financing obtained by early-stage companies and startups. Both banks and non-bank lenders can provide it. It’s also often offered by Venture Capitalists as an additional service to equity funding.

Similar to other methods of debt financing, it prevents further dilution of equity stakes. It’s also not dependent on collateral or your company’s cash flow. Instead, lenders prioritise the potential growth of your business and your ability to raise further investment capital.  

In some cases, lenders are compensated with the company’s warrants on common equity due to the high-risk nature of venture debt. If your company grows, the warrant is highly advantageous for the lender as its value increases.

If you are interested in keeping hold of your company’s equity, you can learn more about venture debt using silicon valley bank’s extensive guide. 

R&D Advance Funding

To speed up the receipt of funds, you can take out a short-term loan on your future R&D tax credits. This is widely known as “R&D Advance Funding”. The advance can be against a future tax credit claim before you start the claiming process, or it can be a loan at the point the claim is submitted (effectively skipping the wait time at HMRC).

This type of debt financing is an excellent option for most businesses as it enables you to receive funds up to 6 months before your year-end, which is when you are required to file your R&D claim. Since it can take HMRC up to 3 months to release your tax credit payments after a claim is submitted, you could, in theory, have your future R&D tax credit up to 9 months in advance.

Once you have received your HMRC credits, you will be required to pay back the loan from the proceeds of your relief.

Read our Guide on R&D Advance Funding to find out more.

Peer-to-Peer Lending

Numerous peer-to-peer lenders have started to appear in the lending market. Companies can source these small lenders for debt financing through platforms like Funding Circle. 

It’s often referred to as debt crowdfunding and can be advantageous for startups. Instead of large organisations, like banks, a small collection of lenders provide debt financing, and using a platform means you avoid expensive intermediaries.

Peer-to-Peer Lending Platforms: 

• Crowdstacker
• FOLK2FOLK
• Funding Circle
• Lending Works

Startup Loans

Government Startup Loans are best suited to businesses that have been trading for less than 24 months. 

This government-backed startup loan scheme is one of the best in the UK for new businesses. Directors can take out between £500 and £25,000 over a repayment term of up to 5 years, at a fixed interest rate of 6%.

In addition to capital, you get 12 months of support and access to numerous business offers. There is also a six month principal repayment holiday, which gives you time to increase your revenue for when you need to start repaying.

In saying that, for some startups looking to raise large amounts of capital, borrowing up to 25k (per director) might not be enough. Also, some business types are ineligible, including banking, money transfer services, and property investing. It’s also worth noting that the director or founder owns the loan, not the company.    

You can discover more about the government startup loan and how to apply from the Government website here.  

Bank Loans

Banks like to see money coming in and out, so bank loans are best suited to startups with a consistent cash flow. If you are pre-revenue, getting a bank loan is highly unlikely. Bank loans fall into two types; unsecured business loans and secured business loans.

What is an unsecured business loan?

This is a loan that doesn’t require security, such as valuable business assets. This type of loan is helpful for startups that need money but don’t have assets to leverage. You can typically arrange unsecured loans quickly, and the repayment terms are flexible. 

Lenders can usually lend up to £100,000 unsecured – even more in the right circumstance. Since there is no security, trading history becomes more important, and the lender might ask for a personal guarantee. 

What is a secured business loan?

This is a loan secured by assets – valuable items owned by your business. This means that if you can’t pay back the loan, the lender has the right to sell your assets to get their money back, which is the disadvantage of a secured loan. The assets could be a variety of things like a warehouse, vehicle or machinery. 

Secured loans tend to be cheaper than unsecured loans as they have less risk attached to them. What you borrow is dependent on the assets you have. The more assets you have, the more you can borrow.

The popularity of crowdfunding has grown exponentially over the past decade, and thanks to crowdfunding platforms like Seedrs, it appears this style of funding is only going to develop and grow more. According to Beauhurst’s Following the Crowd report, 1,632 companies have secured crowdfunding between 2011 and H1 2020.

To just put into perspective how far crowdfunding has come. In 2011, only 8 deals were backed by crowdfunding websites, and in 2019, crowd funders backed 422 deals, and 1,632 companies have secured crowdfunding between 2011 and H1 2020.

There are two types of crowdfunding, Equity Crowdfunding and Reward-Based Crowdfunding, have a read below to learn more about the two alternatives.

Equity Crowdfunding

Equity crowdfunding (also known as crowd-funding or investment crowdfunding) is how your company can raise capital. Typically, equity crowdfunding offers your business’ securities to numerous investors in exchange for funding. Each investor is entitled to a stake in your company proportional to their investment.

Equity crowdfunding is different to reward-based crowdfunding as the model provides a more conventional capital-raising method by offering financial assets, like stocks and bonds, instead of rewards, like goods or services. The process of equity crowdfunding is carried out on specialist platforms like Seedrs and Crowdcube.

Whilst it is more similar to conventional capital-raising methods than other crowdfunding sources, its process is quite different from the traditional way. Instead of a small group of professional investors funding your business, equity crowdfunding targets a much broader group of investors. The aim is to raise the required funds through small contributions from many investors.

The benefits of equity crowdfunding:

• Low risk for investors: Investors are only making a small contribution, so there is low risk. This makes it much easier for you to convince them to part with their money.
• Powerless investors: Equity crowdfunding means that a broad group of investors have small shares in your business. No one investor can gain absolute power.

The negatives of equity crowdfunding:

• Lose equity in your business: The more equity stake you let go of at the beginning, the less you’ll receive in potential returns at the end.

Equity Crowdfunding platforms:

• Crowdcube
• Seedrs
• Syndicate Room

Rewards-Based Crowdfunding

Rewards-based crowdfunding offers incentives like goods or services in exchange for your business development costs. This is the most common type of crowdfunding and what most people associate with this funding.

Whilst rewards-based crowdfunding is a medium through which you can raise non-dilutive capital, it’s not just raising capital that it’s suitable for. It’s a way you can validate your idea, i.e. check to see if your business has legs, build awareness through your crowdfunding campaign and create brand advocates along the way.

In saying this, rewards-based campaigns like this can be incredibly competitive, especially in B2C, and you won’t always reach your funding goals. Therefore, it might be worth considering another avenue and putting your marketing efforts into something else more advantageous.

Rewards-Based Crowdfunding Platforms:

• Kickstarter
• Indiegogo
• Patreon

Friends and family members can act as a source of startup funding by investing in or purchasing an ownership interest in your business venture.

Calling out to friends and family members can often be your only option when growing your business. You might not have the personal finances to bootstrap your business. You might not have a track record of launching successful companies, making it challenging to acquire funding from investors or lenders straight away.

This type of funding is termed as ‘friends, family and fools.’ The reference to ‘fools’ relates to the risk of investing or lending to early-stage companies. This group aren’t experienced investors; they usually have minimal experience in this area and often provide funding without a formal review process or due diligence like angel investors or venture capitalists.

The benefit of this kind of funding is that a relationship with a friend or family member usually results in flexibility regarding repayment. They are also ordinarily willing to provide financing without an extensive background check.

However, obtaining money from a friend or family member can put a strain on your relationship. It can easily lead to a lot of pain and anguish if things don’t go well. It could also be that you surrender too much equity too early without really knowing the total value of your business.

Whilst you have many options for startup funding, bootstrapping is an alternative that many early-stage businesses continue to choose. Bootstrapping means growing your business from the ground up with your own money.

You manage the day-to-day running of your business’ finances and don’t rely on venture capital or investment outside. It’s just you, depending solely on your revenue, savings, monthly income from a day job, credit cards, or personal loans to build your company.

The benefits of Bootstrapping your business:

• You have control: It’s you who makes the decisions and who has complete control over the vision of where you take your business. As soon as you find funding, outside influence and external decision-makers have a vested interest in your business. In addition to this, you don’t have to give up equity, and you don’t have debt repayments.
• You can be versatile: Perhaps your business isn’t ready yet to be looking for funding. Bootstrapping allows you to get to where you feel comfortable and prepared to look for financing and outside expertise. Going to a venture capitalist with an active, revenue-generating business that you’ve developed through bootstrapping will only be looked upon favourably.
• Find your feet: Without outside influence, you can learn from making mistakes and taking risks.

The negatives of Bootstrapping your business:

• It requires blood, sweat and tears: As great as having control and autonomy is, bootstrapping a business requires hard work. You’ll be using everything you’ve got, often using savings or working another day job to support your startup and working unsociable hours without support.
• Lack of Expertise: Startup funding allows you to get help and support. You can acquire knowledge and expertise from investors who have experienced what you are going through.
• Stunt Growth: Early-stage companies often go with startup funding because it allows them to scale up fast, giving them enough money to grow at the pace they need to. Often savings aren’t enough, which prevents you from getting that much-needed cash runway to generate your company’s cash flow.