Access to funding for growing businesses, especially in e-commerce, has never been more important. Since August 2020 the price of a single 40ft container on a ship from China to Europe has increased seven-fold from just under $2,000 to more than over $13,000. At the same time, we’ve seen huge increases in input prices — some timber prices are up over 200%, raw materials for growing food are up 40% and wholesale gas prices are up 250% since January.
This all sits against the backdrop of a pre-existing trade financing gap of $1.5trn that made financing international purchases difficult enough as it was.
Venture Capitalists are investing more than ever, but money is still exceptionally competitive and banks are still as difficult as they’ve always been. To help navigate the difficulties that a large number of SMEs are currently facing, here are 5 alternative sources of financing for fast-growing businesses.
1. R&D Tax Credits — overlooked and not as complex as you think.
Research and Development (R&D) tax relief supports companies that work on innovative projects and the criteria is surprisingly broad. The high-level guidance from the government’s website says “work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology”. If you’re developing new software or new products, you may qualify. R&D tax credits can even be claimed on unsuccessful projects.
For SMEs, if you qualify, you can get up to 33% of your R&D costs back as cash credits or corporation tax relief (depending on your profitability). So if you spent £120k on R&D in a year, you could get back up to £40k. You can claim every year, and also for 2 retrospective financial periods, so if you haven’t claimed before you could collect 2 year’s worth at once.
It may sound complex but it’s worth looking into. At EmpowerRD, we specialise in helping businesses through the R&D claim process and have built a simple calculator to help you work out how much you could save.
We also offer R&D Advance Funding which allows companies to access up to 80% of their R&D claim value up to 6 months before financial year-end. This provides an additional source of capital throughout the year to support a company’s cash flow needs. If you want to learn more, check out our Advance Funding guide.
2. Crowdfunding — raise money and build a loyal following if you do it right.
VCs and angels are notoriously hard to access and even harder to get money from. Opening up your fundraising to smaller retail investors opens up your business to thousands of people who you’d otherwise never be able to receive investment from.
Done right, crowdfunding also creates a network of advocates for your business who are highly engaged — ideal for running trials and giving feedback. The likes of Revolut, Monzo, Moneybox, Brewdog and Chilangos have all raised both equity and debt from the crowd. As noted from the above list, crowdfunding works best for direct-to-consumer businesses where investors become customers.
Remember though, it needs to be managed well. The difference between raising £100k from one angel and raising £100k from 200 crowdfunders is you have a lot more people to keep happy. If you can, you should provide timely quarterly updates, offer discount codes and build an online community that you can use to speak to customers.
3. Revenue-based financing — access your revenue early and only repay when you make money.
Revenue-based financing is still a relatively new product, but it can provide up to 1.5 times your monthly revenue up front. This allows you to spend that revenue on growing your business — either by buying more stock or by spending more on advertising.
It works best for companies with working capital constraints. If you can’t buy enough stock to keep up with demand or if you need to increase your order size to minimise the number of shipments you’re making, then it might make sense. Similarly, if you’ve got a good return on advertising spend then accessing finance to spend more on advertising should help grow revenues even further.
We’ve teamed up with Forward Advances for best-in-class revenue-based financing. They also have an in-house studio team of digital experts for support with strategy and execution to help you spend the money to drive growth. See how much you could access here.
4. Government grants and public funding — free money if you qualify.
There are various government bodies and government-backed organisations that offer grants for a myriad of different reasons. A good place to start is Innovate UK who have a whole host of funding opportunities to help small businesses grow and to boost certain sectors. Schemes currently open to funding range from Women in Innovation Awards (up to £50k for women with innovative ideas) to their Food Production Transformation scheme which offers up to £5m in grant funding.
The beauty of a grant is that it is a grant — no interest, no repayment. Just money to spend on growing your idea and your business. There are loads out there from the National Lottery Heritage Fund to the Princes Trust. Worth looking into.
5. Bootstrapping — use what you’ve got and reduce risk.
The old adage goes that revenue is vanity, profit is sanity, cash is reality. In recent years, growth has been the most valuable asset a company can have — see Airbnb, Revolut and Uber. A lot of our customers are growing really quickly at the expense of making a profit. Spending on new sites, building new operations, hiring & training new staff, developing new products, opening new channels.
A less popular alternative to ride out periods of volatility like we’re seeing at the moment is to keep lean, use sources of finance readily available (credit cards, overdrafts) and manage costs tightly. Cutting back on non-essentials can do a lot to improve cash flow, grow margins and profitability.
This post was co-written with our partner, Forward Advances. Find out more about their growth financing here.