What are the Different Sources of Finance?
There are three main sources of finance available to start-ups and SMEs in the UK. Each is appropriate to different stages of the innovation chain (see Definition of the Stages of Business Development).
- 'Soft' Funding - is most typically associated with grant funding or subsidised financial assistance (such as R&D Tax credits) provided by the public sector. Increasingly most grant funding requires an element of match funding on the part of the applicant.
- Equity Finance - in which capital is provided to the company in return for a shareholding in the business. Examples come from both public sector (seed funds) and private sector (angel investors and venture capital).
- Debt Finance - is characteristically the provision of a loan of some form that is subsequently repaid at a pre-agreed interest rate.
The table below represents a simplified summary of these three funding types.
| 'Soft' Funding | Equity Funding | Debt Funding | |
|---|---|---|---|
| Examples | Grants R&D tax credits |
Seed funds Angel investors Venture capital Corporate investors |
Loans |
| Provider | Public sector | Private businesses and individuals | Banks and specialist financial providers |
| Typical sums | £10,000 - £500,000 | £500,000 - £5m+ | Variable |
| Relevant stage of business development | Applied research/demonstration | Demonstration through to growth markets | Businesses that are already generating revenue |
| Important characteristics | Strict eligibility criteria and commonly requires match funding (may be 'in kind') | Typically exit sought by the investor within 3-5 years | A company that defaults on payment may be put into receivership |