Start-up grants can help fund entrepreneurs who are looking to start a business or newly formed businesses that need additional capital beyond the initial money they have put into the business themselves. More often than not this non-repayable money comes from a Government source or other business support organisations and can help a business expand faster than it would without this cash injection.
What do they pay for?
Start-ups may seek grants to cover a range of specific funding purposes, which are briefly outlined below.
- Business Plan – Get help to develop a solid plan to grow your business over the first few years.
- Market Research – Carry out competitor and industry research.
- Research and Development – Carry out feasibility studies or create a prototype.
- Purchasing Capital Equipment – Purchase or hire new machinery or equipment.
- Purchasing ICT Equipment – Purchase new computers or networking equipment to go digital.
- Company Structure – Determine how to best organise your business for strategic success.
- Hiring Staff – Create new jobs for key roles in your company or hire interns.
- Training – Train your staff and develop your own skills.
- Develop a Website – Create an online presence or e-commerce store for your products and services.
- Marketing – Develop your branding and carry out online and offline marketing.
- Premises – Renovate a building or develop a shop front.
What’s the alternative?
If start-ups cannot readily access a grant in their sector or region that fits their needs then the alternative is to take on a repayable business loan. This finance can either be accessed from a traditional lender, such as a bank or commercial finance specialist or you can seek low interest or interest-free loans from a specialist lender backed by the Government or a non-profit organisation.
What are the pros and cons of a loan vs a grant?
Grants – What are the Pros and Cons?
Advantages of taking a grant
- Grant funding is non repayable and means there is no pressure on business cash flow moving forward compared with repaying loans and their associated interest.
- Grant funding typically targets specific areas of business and can allow you to explore and expand new areas of your operation that previously have not been developed and made more efficient.
- If you are awarded a grant from a government backed scheme or enterprise support body, this is considered a vote of confidence from the awarding body in question and means they have backed your business proposition as one that is highly likely to succeed. Details of your receiving an award is often publicised in local press or trade publications and this can be used as a promotional tool to secure new business.
Disadvantages of taking a grant
- Grants usually only offer a percentage of total funding needed for a project, in many cases in the UK match funding of 50% is typical.
- Access to grants is highly competitive. As the money is free you will be competing against other businesses and will need to stand out from the rest of the applicants to be awarded funding.
- Grant funding pots are often restricted to specific sectors or regions, so it means if you do not operate within that sector or geographic region then you are not able to access the funding. Some areas and sectors have less funding than others.
- Grants often come with terms and conditions and restrictions, which means you are only allowed to spend the money on what you specifically applied for. Evidence must be provided to show where the money has gone and sometimes the grant is only released as a reimbursement after the project has been completed.
- It is harder for unestablished start-ups to access money from grants. More often than not a business needs a track record to prove they will make good use of the money and not see the project fail. Some schemes will only accept start-ups with up to 2 years of trading records as evidence.
Loans – What are the Pros and Cons?
Advantages of taking a loan
- Loans will typically cover your entire project costs meaning you will not need to seek additional funding from elsewhere.
- Some loans taken from government backed sources and non-profits can offer unsecured loans that don’t require collateral and typically charge a lower rate of interest compared with commercial loans.
- Loan funding is flexible and can be used for anything in the business and there are typically no restrictions on what areas you may spend the money on that would otherwise be restricted if you were using a grant.
- Loans are not limited by sector and means that certain businesses traditionally excluded from grant opportunities, such as consumer facing cafés and retail outlets can more easily access this type of finance.
Disadvantages of taking a loan
- Whenever you borrow a loan, you must always pay that money back over a period of time with interest and this can put a strain on business cash flow in the future if trading conditions become tough.
- There are some cases where interest rates for start-ups can be higher due to the greater level of risk and unsecured nature of the loans for those without a proven track record. Businesses with a good relationship with their bank can typically negotiate to get a better interest rate.
- If you are trying to seek a loan when your business is already facing financial difficulties, there is a chance that you may be refused a loan if your business is deemed too high a level of risk. Access to traditional commercial loans can also “dry up” when there are difficult economic conditions taking place across the UK.
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