Always find out what help you can get before you start. Once you have established your business it may be too late and you will miss out.

In this chapter, four things that really matter:

• ˜ Obtaining grants to help your business
• ˜ Considering funding from your Local Authority
• ˜ Understanding the role of soft loans
• ˜ Gaining equity funding

The overriding principle for obtaining grants and other forms of financial assistance is that you must make your application and have the assistance agreed before you start your business. Unfortunately, a lot of businesses miss out because they do not follow this simple rule.

There is a substantial amount of help available to new businesses in both a financial and non-financial form. lt is absolutely essential that you research the position thoroughly. Some grants are reliant upon either jobs being created or investment in new plant and machinery. Others have no restrictions whatsoever and are available purely by making a simple application.

It would be impossible to cover all the forms of assistance available throughout the United Kingdom and it is up to you to find out what is available in your locality. What I can do is outline some of the types of assistance that are available to businesses in my own location, the North East of England.

Is this you?

I’m not creating any jobs so I won’t be eligible for anything, will I? • I can’t be bothered to apply, the forms are too complicated. • How can the Local Authority help? They don’t offer anything. • I don’t want anyone else having a stake in my business, I want total control.

Obtaining grants to help your business

Grants can come from a wide variety of sources, but in this section we will concentrate on the assistance provided by central government through the Department of Trade and Industry (Dti) and the Small Business Service.

The Small Business Service was established to help businesses and to represent their interests across government. It works closely with the network of Business Links in England, Business Shops in Scotland, Business Connect in Wales, and EDnet in Northern Ireland. These centres should be your first port of call if you are looking to start a business. Quite apart from the advice and guidance that they offer, they can also provide financial and non-financial grants to your business.

Financial grants from these business support organisations have, however, been substantially reduced in recent years and are only generally available in small amounts, somewhere between £100 to £250.The main provision of assistance comes in a non-financial form. Examples include help with:

• ˜ Design and production of business cards and stationery.
• ˜ Advice on putting together your business plan.
• ˜ Guidance on market research and strategy for your proposed business.

Some of these take the form of training courses and others, such as design work, are undertaken by experienced professionals employed on a consultancy basis. In most cases, all of this support is offered free of charge.

Support is also available through these organisations on a subsidised basis where accredited consultants are employed to assist you and their fee is only partly payable by you. As an example, in Sunderland a 50% grant of up to £2,000 is available towards the costs of employing a professional to design your website. However, the support that will be available does vary widely and you must approach your local advice centre yourself.

Through the Dti, the government offers a number of schemes which can provide assistance in terms of either grants or awards. The main two grant schemes are:

• ˜ Regional Selective Assistance (RSA)
• ˜ Regional Enterprise Grant (REG)

Another example is the SMART scheme, which provides grants to review, research, or develop innovative new technology. All of these are subject to extremely rigid criteria and it has to be said that the application forms can be complicated. Within your local advice centre, however, there should be a person that can offer you advice and guidance in this respect.

The support available through the Dti is subject to constant review and change and you will need to check the current situation. The critical point to remember is that under normal circumstances, no expenditure must be incurred on the project related to the application before the grant is agreed.

Considering funding from your Local Authority

Most Local Authorities offer a range of incentives and grants for businesses to create jobs in their area. Some new businesses overlook this source of funding on the basis that they are creating no new jobs. This is factually incorrect. If you are starting your own business you are, at the very least, creating a new job for yourself.

You should contact the Economic Development Office within your Local Authority to find out what you may be eligible for, because there will be some diversity across the UK. To give you some specific examples, however, the following schemes are available from the City of Sunderland Council:

• ˜ Rent relief grants – available for between 25% and 50% of the rent payable for the first year of a new lease.
• ˜ Basic services grants – a 50% grant is available for the provision of new and essential services including electricity, gas or drainage work.
• ˜ Interest relief grant – amounting to 5% per annum for up to two years of the value of loans used to purchase machinery or building for industrial use.
• ˜ Removal grants – available to cover up to 50% of eligible costs incurred to move to industrial premises in the city.
• ˜ Trainee employment grants – grants are awarded to cover 75% of wages of new trainees in the first year and 25% in the second year.
• ˜ Exhibition grants – to cover 50% of the costs of exhibiting at a recognised trade exhibition outside the North East up to a maximum of £5,000.

For obvious reasons, all of these grants have eligibility criteria, in addition to which they are entirely discretionary. This effectively means that even if you do qualify you may still not receive the funding because in simple terms the Council may not have any money left for the scheme.*

Understanding the role of soft loans

Soft loans are loans that are available on generous terms and at lower interest rates than would be charged commercially. In general terms, they are provided through local Enterprise Agencies and are available where conventional funding, for example through a bank, cannot be obtained for any reason.

Enterprise Agencies are not-for-profit organisations which provide a wide variety of services to small businesses on a localised basis. The loan funds that they operate will be available on various terms and conditions, and, in some circumstances, they are only available to people within a certain age band.

There are also many organisations that provide soft loans, the funding for which is provided by large corporations. One example of such a fund is the loan fund operated through Northern Enterprise in Newcastle-upon-Tyne which is sponsored by the Northern Rock. A further scheme, specifically designed for young entrepreneurs, is operated by the Prince’s Youth Business Trust. In a similar manner, the Royal British Legion operates a fund which is only available to ex-servicemen or women.

In some circumstances, the provision of a soft loan can actually lead to further conventional funding being raised. The reason for this is that most soft loan fund managers take a personal interest in the businesses in which they invest and accordingly they provide a high level of support and advice. This involvement can give confidence to the traditional funders, e.g. bank managers, who know that a strict degree of control will be exercised.*

In some cases, there are actually informal agreements between the managers who administer the soft loans funds and the high-street banks. This works on the basis that the bank will match the amount of the loan that is made by the soft loan provider, usually up to an agreed maximum, in order that total

funding for a project can be achieved on a shared basis.

Gaining equity funding

Most small businesses avoid equity at all costs on the basis that they want to maintain sole control. Most small business start-ups will not actually be able to gain equity funding, even if they wanted it, because providers of such capital are usually only interested in making a substantial investment. The normal criteria for most venture capitalists is a minimum equity investment of £250,000.

In some circumstances, however, especially where your own capital contribution is small and your borrowing requirement is large, equity funding will be essential as part of the overall package of funding. We have, of course, already looked at the gearing aspect in Chapter 2.

For the start-up business there are two likely sources of equity funding:

• ˜ Business Angels
• ˜ Regional Venture Capitalists

Business angels are private investors willing to take shares in a business. They may, or may not, take an active interest in the running of the business, although it is usual for them to have some expertise which the business can utilise.

The investment they make in your business is long-term and the actual terms of repayment can vary substantially. In some cases, no defined repayment programme is agreed, the business angel gaining a return on the investment by sharing directly in the profits.

The easiest way to find a business angel is to register with the National Business Angels Network. This organisation was established specifically to bring together businesses and private investors and it is sponsored by all the major banks.

Regional venture capitalists operate on a localised basis, offering smaller equity funding than the national venture capitalists. In some circumstances, the minimum investment that they will consider is £10,000, with a maximum investment of £250,000.

The investment is usually required in the form of redeemable preference shares with clearly defined terms on which they are to be redeemed. Time-scales can vary, but in general the investment will need to be paid back over a three- to seven-year period.

You also need to be aware that equity funding provided by a venture capitalist can be extremely expensive. The simple reason for this is that it is high risk lending and priced accordingly. It is not uncommon to see returns in excess of 20% per annum being required.

Obtaining equity funding can also be a long drawn-out process. You will need a comprehensive business plan, together with realistic and achievable financial forecasts for a three- to five-year period. Once your initial proposal is accepted, your business will then be subject to a process called ‘due diligence’. This is an extremely thorough investigation of your business, usually carried out by expert professionals.*

Summary points

• * Find out what assistance is available before you start your business.
• * Make any application for grants before you spend any money.
• * Contact your Local Authority and discuss your plans – you may be surprised at the help they provide to new businesses.
• * Visit your local Business Link to see what non-financial help may be available.
• * Do not dismiss equity funding – under the right circumstances it can be a critical part of your overall funding package.