There are several avenues to pursue when looking to fund your startup, however, many of them fall under the umbrella of equity funding.
In this case, founders sell shares or equity in their business in exchange for capital. While many of these options, such as venture capital investment, are well-known funding opportunities, non-dilutive funding has become increasingly more popular amongst early-stage startups and scale-ups.
As the name suggests, non-dilutive funding opportunities allow entrepreneurs to receive capital without giving away ownership of their company.
This method of funding allows founders to keep control of their business and its major decisions, which can be essential at such an early stage. In some circumstances, this can also be an easier way of accessing funding than pursuing angel investment or VCs, as the amounts of capital are normally smaller and can be less competitive.
So, what are the most common non-dilutive funding options available to UK founders?
R&D Tax Credits
For innovative startups in the UK, the R&D Tax Credit Scheme introduced by the UK government over 2 decades ago has been, and continues to be, an excellent non-dilutive funding opportunity.
The R&D Scheme is split into two sub-schemes for which you can apply, depending on eligibility criteria.
SME: Small-Medium Enterprise Scheme
This portion of the scheme is geared mainly towards newer and smaller businesses such as early-stage startups, with eligibility requirements capped at having less than 500 employees and making less than €100,000 in annual turnover.
Loss-making SMEs can still claim credits, as long as they align with the eligibility criteria.
For loss-making businesses, the base rate you can claim up to is 18.6%, but if more than 40% of your business's yearly expenditure is on qualifying R&D activities, then you can claim up to 27%! However, profit-making companies will be able to claim back a fixed rate of 21.5%.
RDEC: Research and Development Expenditure Credit
For businesses with more than 500 employees and make more than €100,000 in annual turnover, you can submit your claim under the RDEC scheme. You will receive cash credit, but unlike the SME scheme, this is subject to corporation tax.
Eligible businesses under RDEC can claim up to 20% of their R&D expenditure, which becomes up to 15% after corporation tax.
In some circumstances, SMEs can also submit their claim under RDEC. Predominately, this is if the SME in question has been subcontracted to do the R&D work by another company, or if the project has received additional grant funding.
Grant Funding
Grants are an excellent way of receiving non-dilutive funding for innovative R&D businesses.
There are three main varieties within grant funding that tend to align with what stage your business is at:
government grants,
enterprise grants,
corporate grants.
To read about these in more detail, our partners at Claim Capital have explained which grant you should be applying for dependent on your business and stage.
While grants are an excellent funding opportunity, especially as an alternative to equity funding, the competition for them is fierce, so it is important to apply for the grants that best align with your business and its mission.
Revenue-Based Financing
Before revenue-based financing, founders had to pick which aspect of their business they would sacrifice in order to gain investment.
Now, they can have it all.
Although businesses that have raised capital through revenue-based financing will have to make regular payments to their investor’s principle, the founder still retains full ownership of the company.
Additionally, the repayments are directly proportional to the business’s monthly income, so there are no fixed payments. If revenues slow, so will repayments!
What's the process?
Once you've chosen a revenue-based finance lender, they will take a look at your financial history to determine:
How much they are willing to lend you
The percentage of revenue you'll be paying back
Unlike most forms of equity funding, there's no need to submit a pitch deck or overly detailed long-term business plan in order to secure revenue-based financing. Lenders will make their decision based on your projected growth and current turnover.
So, why pursue non-dilutive funding when looking to scale your business?
While these are not the only avenues of non-dilutive funding a business can take, they are some of the most popular, particularly for those conducting large amounts of R&D.
Even if you wish to pursue equity funding in the future, such as applying for VC investment, it is still a great idea to see which non-dilutive funding options are available to you. You'll still receive access to any necessary funds you need, but retain full control over the initial direction of your business and plan for long-term growth.
There are even ways in which you can combine these - such as grant funding & R&D Tax Credits - to secure the best funding opportunities for your business.
Our partners Claim Capital can assist you, regardless of your stage, on the best choice of action for pursuing non-dilutive funding, whether that's submitting your R&D claim or assisting in writing your grant application.