LS Legal News Bulletin
Start-up and Innovator Visas: funding options for foreign entrepreneurs.
Friday 28th January 2022
Securing funding for your new company is one of the most challenging aspects of starting and scaling a business. To navigate this complicated field, we have prepared this easy-to-follow summary of the financial options available to UK start-ups., There is a plethora of options available from informal loans to crowdfunding and government funding, each bringing different advantages and disadvantages.
Friends and Family
If you do not have a strong track record of being a successful entrepreneur or your projections are not convincing enough, it is unlikely that you will be able to secure funding from traditional investors or lenders at the seed stage.
If you do not have personal capital to invest in your business, your first consideration for start-up funding could be your friends and family. This group of investors is sometimes referred to as "Friends, Family and Fools".
Often overlooked, personal contacts can usually be more flexible when it comes to repayment and other terms. They are generally more willing to provide funding without the extensive due diligence and background checks that would usually come with equity raise or a private loan.
Raising money from close contacts does not come without its pitfalls. Your relationships could be damaged if things do not go according to your plan. Your company's valuation is also challenging to calculate so early on, you could be giving away too much equity in your venture.
Another possible pitfall is that should your business fail, your friends and family may still demand their investment back. This is not something a professional investor, who understands the risk of start-up investment, would ever do.
In light of the above, it is important to ensure that both sides are protected should you accept investment from friends and family. You will need to manage expectations and limitations at the outset and have an agreement in writing which covers the possible eventualities.
From Patent Box and R&D Tax Credits to Creative Industries Tax Reliefs and Innovation Grants, Britain's government funding and grants system is as vast and verdant as any other in the UK's financial landscape.
R&D Tax Credits are a scheme that rewards eligible businesses with financial incentives for performing research and development activities.
R&D Tax Relief reimburses businesses up to 33% of their development costs, such as wages and subcontractors fees, in a form of a corporation tax reduction, a tax rebate or a cash payment if the business is not profitable.
R&D Tax Relief is accessible by businesses in different industries, from fashion to food production, medicine to manufacturing. The company should be incorporated in the UK, pay UK corporation tax, and the costs you would like to claim meet HMRC's definition of "Research and Development".
R&D Tax Relief is sub-divided into two schemes: the Research and Development Expenditure Credit (RDEC) and the SME (Small Medium Enterprise) R&D Tax Relief.
You can apply for SME R&D Tax Relief if you are a start-up. However, you may need to use RDEC if your company is linked to one or more larger businesses.
Innovation grants accelerate innovative technological developments by allowing companies to convert ideas into concepts, prototypes and commercial products.
Ideas eligible for a grant can come from companies of any size. Many innovation grant competitions have separate tracks for early-stage businesses which grant funding for technical feasibility research and other foundational R&D activities.
Winning a grant early in your business's lifecycle gives you external validation of your idea in addition to money. A grant serves as a statement from a credible source that your work is technologically significant and innovative.
Angel investors and VCs tend to notice start-ups that win an innovation grant. If you win a grant early, you stand a better chance of attracting investment from other external sources in the future on more favourable terms.
The key is to watch what competitions are available from the major grant-awarding bodies like Innovate UK.
Creative industry tax reliefs are designed for companies working in artistic sectors. There are eight fields the creative tax relief can be applied to.
The reliefs are available for:
• Video games
• Children's television
• Animation television
• High-end television
• Orchestral concerts
• Museum or gallery exhibitions
• Theatrical productions
Creative industry reliefs refund up to 20% of the eligible costs of the business as a tax reduction or a cash payment.
If you are developing AR or VR experiences or a video games studio, your business may claim thousands of pounds back in Video Games Tax Relief.
The Patent Box allows companies to convert IP into a recurring corporation tax relief. This scheme offers a substantial source of additional capital for profitable businesses. It also allows growing companies to monetise their patents quickly.
The Patent Box gives eligible companies a reduced tax rate on the profits by patented technologies and products. For example, instead of the usual corporation tax rate, you can pay a reduced tax rate on earnings from product revenues.
If you have a patent and pay corporation tax in the UK, it is highly likely your company might be eligible for the Patent Box scheme.
The Prince's Trust Enterprise Programme supports 18-to-30-year-olds looking to launch their start-up.
They offer a range of resources: from business plan templates to marketing advice and access to their network. The Enterprise Programme helped almost 90,000 young entrepreneurs take their first steps into business world.
The crowdfunding industry has skyrocketed in recent years. Thanks to the rise of crowdfunding platforms and a growing demand amongst retail investors for equity in promising UK start-ups, the trend is highly likely to stay for years to come.
Crowdfunding is worth exploring as an option for your business if you find it challenging to raise capital from more "traditional" sources. Please note that crowd-sourced finance is a highly competitive space.
To stand out from other businesses raising money through crowdfunding can be expensive. Even if you do spend a lot of money on marketing and outreach to potential investors, there is unfortunately no guarantee that you can reach your funding goal and you might have to start your campaign again or change your projections to reflect the amount raised. Companies rarely raise large amounts of investment through crowdfunding.
Crowdfunding can be a helpful part of your funding mix, allowing you to reach more substantial funding sources.
Our Corporate & Commercial team consists of experienced business solicitors dedicated to providing legal advice to entrepreneurs, start-ups, scale-ups, and early-stage businesses (including those founded by foreign entrepreneurs). LS Legal Solicitors are also well versed and highly experienced in providing advice and assistance on Start-Up and Innovator visas applications. We appreciate that many of the requirements may seem overly complex and onerous. However, we guarantee to make your experience as smooth and stress-free as possible.
For the quickest response, please WhatsApp or call us on +44 (0) 75 3595 9450. You can also contact us via email at info@LSLegaLUK.com or use the contact form to discuss your requirements further or arrange an appointment with one of our experts.