3 tips to boost cashflow without diluting equity
Even with a stand-out business idea, securing the funds to set your plans into motion is one of the biggest hurdles an emerging enterprise will face. Luckily, there are a number of ways in which your startup or SME can gain capital.
Venture Capitalists, Accelerator schemes, and some crowdfunding platforms are happy to hand over cash but in return they expect a slice of the pie.
All of these are appealing, and welcomed by many founders with open arms, however, by approaching funding more strategically, you can receive financial support whilst keeping a firm grip on your equity.
In case you didn’t know, there are a few ways for your startup to gain funds without having to offer anything in return.
Here are three fantastic ways to boost your cashflow without diluting equity:
1. Grant Funding
Scenario: You’ve conjured up a killer product or service, and the blueprint to execute valuable research and development. Unfortunately, you’re struggling to get going without a cash injection.
The UK is home to a generous grant funding system that provides commercially viable R&D projects with the financial means to kickstart their business venture. Every year, innovative and valuable startups are granted cash sums that can be used to cover almost any expense needed to bring their vision to life.
For successful applicants, there are no hidden caveats to worry about, as grant funds are:
- 100% guaranteed upon success;
- Totally non-repayable;
- Not at risk of diluting your corporate equity.
That’s guaranteed, free money, with no strings attached. The government won’t come knocking on your door to ask for anything in return.
I know what you’re thinking. If these benefits are out there for the taking, why doesn’t every startup rely on grant funding? The truth is, these attractive schemes naturally stir-up fierce competition, with applications having spiked to record numbers over recent years.
If you want to stand a chance of being accepted, producing an outstanding proposal is vital. A huge proportion of applicants don’t meet the criteria, as they fail to demonstrate the positive economic and societal impact that their R&D will bring. There’s no shortcut to reaching this pot of money. Successful grant proposals often come from professional guidance from experts in the field.
Don’t be disheartened. The payoff is worth fighting for!
One such example of a renowned grant for startups and SMEs is the Innovate UK Smart Grants scheme which distributes £25m each year. Capital aside, validation from grant-awarding bodies such as Innovate UK may attract VCs and Angel investors down the line, by providing your startup with an impressive stamp of approval.
2. Research & Development (R&D) Tax Credits
Scenario: Within the last two years, you’ve spent plenty on funding your research and development project. Whether you’re making profit, or are yet to reach this milestone, you could do with more cash to protect your growth trajectory.
Whilst grant funding can support the future of your business, R&D Tax Credits offer financial reward for innovation that’s already taken place.
R&D Tax Credits offer startups that have spent money on R&D the chance to claim back up to 33% of that capital, after their first financial year. This substantial proportion of cash can be a game-changing way to re-invest into the growth of your startup. It also doesn’t sacrifice any of your equity.
Two types of R&D Tax Credit Claims are up for grabs. Most emerging companies will be eligible for the SME Scheme, provided that they have:
- Less than 500 employees;
- Less than €86m in gross assets;
- Achieved less than €100m in turnover
Now the interesting part - the amount of tax relief your startup could receive is dependent on your financial position at the time filing the claim.
Loss-making companies are entitled to claim 33% of total R&D eligible costs, which is paid directly, in cash, into your bank account.
Alternatively, profit-making companies can be awarded up to 25% of total R&D eligible costs, this time in the form of a tax credit.
If the above criteria doesn’t align with your startup, don’t worry!
Should you be lucky enough to have amassed either over €86m in assets, over €100m in turnover or over 500 employees, then the RDEC Scheme is perfect for you.
As RDEC applicants have a financial advantage, R&D tax relief operates at a fixed rate of 13% (subject to corporation tax), which can still be used to make a real difference.
The RDEC Tax Credit scheme is even available to startups that have previously received grant funding.
That’s right, non-dilutive financial support is on offer at both ends of your R&D process.
Filing for an R&D Tax Credit doesn’t have to be an expensive, drawn-out process. In fact, expert advisors such as Claim Capital can submit a claim to HMRC, for an affordable fixed fee, within 3-5 days. It’s worth doing some research beforehand to ensure your R&D Tax Credit advisor isn’t overcharging and underdelivering.
3. Debt Financing
Scenario: You don’t fancy your chances when it comes to highly competitive grant funding. You want to raise funds for your business, and retaining ownership is important to you. Losing equity is a total dealbreaker.
Debt financing is an excellent route for entrepreneurs who don’t want to dilute equity or sacrifice control of their startup. To avoid doing so, many founders choose to pursue funding from loans that they will pay back alongside a rate of interest.
Of course, racking up interest can be daunting for early-stage businesses. But there are many extremely reasonable debt-financing schemes that could help launch your business into its next stage of growth.
One of which is the Startup Loans Scheme, available for startups and SMEs within their first 2 years of business, and offers:
· £500 - £25,000;
· a repayment term of up to 5 years;
· a fixed interest rate of 6%.
A Startup Loan offers an accessible and transparent method of gaining valuable capital, with an interest rate beating most high-street banks and private lenders. What’s more, applying is far quicker and easier than other methods of non-dilutive fundraising.
It’s worth knowing that today’s startups aren’t limited to traditional interest rates when it comes to debt-funding. Instead, there are many alternative services which offer companies a way to raise funds through debt financing. For example, Uncapped is a unique financing service with investment capital offers ranging from £10k - £5m through a revenue share agreement. In other words, in exchange for capital, Uncapped charges enterprises a flat fee starting at 6%, with repayments in line with the company’s monthly revenue.
This alternative to an interest rate uses your business performance to determine a fair and flexible rate of repayment, taken as a percentage of sales. Again, you don’t need to worry about losing equity with debt financing companies such as Uncapped.