A local SME approached me recently about a grant application they were considering. They had a great innovative idea which would take their existing, proven and internationally successful product to the next level. They had a clear plan how to develop it. The grant would potentially offer 35% of costs for a South West based innovation project. They clearly they ticked all the boxes in the competition brief, so why didn’t they apply?
“No one wants to work long hours on an application which you know is unlikely to deliver”
Perhaps this is a perverse sales tactic of mine, but more often than not discussions like this end up without a grant application being made. No one wants to work long hours on an application which you know is unlikely to deliver, or is not in the best interests of the client. So when approached about potential grant applications, my first step is always a critical assessment of the likely chances of business success.
Start-ups desperate to get their idea of the ground often cast their funding net wide. Grants are obviously a great way to fund early in the innovation cycle. However, when the mortgage needs paying, and that great idea is just a few months away from being investor ready, start-ups can sometimes see almost any grant as ‘made for them’.
After all that grant money might just keep you afloat until that illusive far sighted investor is hooked. Reading the competition brief through rose-tinted lenses, their business idea bends to fit. Given the high competition for grants this approach is unlikely to succeed. If it does, you are then set on working to meet the grant aims, not your strategic business objectives which is not a recipe for long term success or investor buy-in.
Now in this case I had none of those reservations. They had a compelling proposition that matched the grant competition requirements, and a project well aligned to their business strategy. Overall a great chance of securing funding, but was it really the best way to go?
Take nothing for granted
Business success is more than just winning the grant application. How does this grant funding compare with other funding routes, and fit in with your other priorities? Grant funding is a great way to fund your idea without diluting equity, but it is not without costs, constraints and disadvantages.
In this case the grant offered 35% funding of approved costs, which is relatively low level for an innovation project with uncertainty and risk. Even worse there are going to be additional costs that dilute this recovery rate:
- Overheads of the application process, in time and effort and advisors fees which can’t be claimed.
- Non-recoverable costs include external audit fees, work outside grant scope and things that you have to do but over looked in the application plan.
- Preference for work by employees and UK subcontractors, when overseas contractors might deliver cheaper
- Additional work to meet grant requirements of delivery, management and monitoring
- An innovation project has to deal with uncertainty, so may need more work than planned to achieve its outcomes.
- Impacts on other funding such as R&D tax credits
- The grant sets the start and duration of the project, not you – you may be able to deliver the sane business benefits quicker
So overall that grant 35% funding level may not be as good as it first seems. It is looking more like 30% or less of costs maybe recovered, and those additional grant related costs and effort need to be undertaken that you wouldn’t otherwise be spending.
Don’t forget the tax
You also need to consider the tax implications. I often work with Mike Laughton of Bath based Munro Brown and sought his advice. As an innovation project with a high degree of risk and uncertainty, the project would be eligible for SME R&D tax credits, giving 130% corporate tax relief on the allowable R&D costs, so a recovery rate not dissimilar to the grant offer. However if grant funding is accepted, this SME R&D tax credit can no longer be claimed, due to state aid rules. They could still claim the lower 11% of the RDEC tax credit scheme relief, but that still requires a claim to be administered and processed.
Finally, and perhaps most significant is the impact of that most precious of SME finite of resources, management team time. They are going to bear the extra effort of applying, management and auditing the grant project as well as support an R&D tax credits application.
With this scale of project having to devote time to both these tasks would distract from the real job in hand – creating a new product and selling to clients. So for this typically stretched SME management team this is just too much to take on.
So in this case working leaner, to a faster delivery timeline and then claiming 30% R&D tax credits is a more cost effective and manageable way to achieve the business outcomes.
So another lost sale for the Grants Ninja, but definitely the right decision for the client!
He has applied for and managed delivery of a variety of Innovate UK-funded projects, securing over £2million in grants.
- You may like: Startup funding in Bristol & Bath: Who’s got the cash?