Three alternative funding sources for your business

As a virtual CFO and angel investor working with early stage companies and SMEs, I'm often asked about where to get funding. Businesses always want to know about angel investment and venture capital. For some reason grants are usually overlooked. Yet they make up a significant source of funding for the ecosystem, particularly relevant for younger companies. Government and other organisations annually pump in excess of $50m into startups, through a variety of grants. In addition, every year over 5,000 early stage companies receive cash back from the ATO through the R&D tax incentive.

"When it comes to grants for startups and SMEs, the first thing I would say is to do your homework," says Anne Furey, CEO of GrantSmart. "The best place to search is the Business Grant Guru database, it's credible, reliable and it's free. There are hundreds of grants across Australia, from $100 upwards, and the Business Grant Guru database allows you to quite a focussed advanced search. Don’t just stick to searching for grants in your own State either, some State Government grants are available to businesses in other States, or there might be opportunity for you to conduct some of your activities, or even move your business, to another State if the right funding is available there."

Accelerating commercialisation

The federal government's Entrepreneurs Program provides innovative companies with Accelerating Commercialisation grants of up to $1 million. Since its inception three years ago, the program has handed out over 230 grants averaging $0.5 million per grant. Recipients are typically in medtech and pharma (44 grants), advanced manufacturing (43 grants) and food and agribusiness (35).

The grants are provided as matched funding, in other words you're given a dollar to match every dollar you spend. This means that unless you have your own funds, or the support of an investor, you won't be able to access the grant.

As angel investors we are keen on investee companies claiming these AC grants where possible, as they effectively double the impact of our investment, with no loss of equity. Because of this there is typically a good relationship between angel groups and AC reps, and referrals between them often occur. To a certain extent, the involvement of an AC grant de-risks the investment for an angel investor, and similarly the angel's willingness to invest is a vote of confidence which can enhance the company's application for a grant.

"You don’t necessarily need professional help or a consultant to prepare your application," says Furey. "However if you don’t have the time or the skills, or if it's for a large grant, then you may benefit from getting some advice and support. Most business grants are highly competitive, and the more money you are applying for, the higher the bar you need to jump over, and the more you have riding on the outcome."

R&D tax incentive

By contrast much of the startup community is pretty familiar with the R&D tax incentive – even if mainly in the context of recent headlines about clamp downs, real or perceived, on businesses in the software sector.

The basic benefits and requirements of the incentive are broadly understood. Only companies can claim (so not sole traders), experimental activities must be identified and qualifying spend of at least $20,000 is required. The key benefit to a loss-making start up with turnover of less than $20 million is the 43.5% refundable offset, which can be a cashflow lifeline just when most needed.

"Critical to eligibility is identifying the technical knowledge gap that core R&D activities are seeking to bridge,” according to Amanda Kearney, R&D tax specialist at Scale Partners. “Activities should be undertaken to prove or disprove a hypotheses by experimentation. Feedback from the ATO suggests too many registrations identify an unknown commercial or economic outcome instead of a technical one, or the hypotheses is not capable of being proven right or wrong."

Identifying a knowledge gap or technical uncertainty can be a challenge for businesses which are scaling up. Fast growing businesses can also bring into play a second layer test. Activities which are directly related to the production of goods or services often have commercial objectives as part of the motivation for undertaking them. This alone does not mean an activity cannot qualify, but extra care is required to demonstrate the dominant purpose for the activity is to support core R&D activity.

Most in the startup space will be aware of the recent noise around the applicability of the incentive to software-related businesses. This has made the headlines and will continue to do so with software making up the fastest growing segment of the tax incentive program.

"One of the challenges is that the legislation was not written with software activities in mind," according to Kearny. "Nonetheless, properly assessed and written up claims should continue to be supported."

The good news is that the guidance-led approach by AusIndustry has resulted in plenty of guidance material available to businesses considering their eligibility for the incentive including the latest advice for software-related businesses.

Export Marketing Development Grant

While most people have heard of the R&D tax incentive and are actively claiming it, I find very few startups and SMEs are aware of the EMDG. Anecdotally I'd estimate that over the past year I've spoken to around 30 companies who would likely be eligible to claim the grant, but only around 25% of these had even heard of the program, and only about half that had applied for it.

The grant is designed to fund Australian companies who are either exporting, or trying to export. A common misconception is that export involves only physical goods. If you are providing software, chances are that a large proportion of your sales originate overseas. So you are exporting. What's more, you may not even have achieved your first sales, but if you are flying overseas to pitch to or engage with prospective clients, or attend a trade show, then this is eligible spend.

"Unlike Accelerating Commercialisation, this isn't a subjective grant and it isn't a competitive grant," according to Jonathan Detata of Corporate Grant Consulting. "As long as you satisfy four basic things, you can claim it: your turnover is under $50m, you have an ABN, you have an eligible product or service and you intend to export it."

The qualifying threshold is $15,000 of spend per year - though in your first claim you get two years to reach that threshold. You then get back 50% of eligible spend costs exceeding $5,000, subject to certain caps.

"The most important aspect for a potential client is to come and speak to an EMDG advisor before starting to spend money on overseas activities," says Detata. "I can help them maximise their grant before they even start spending money. A lot of people I meet with have paid an overseas sales rep a commission, and unfortunately cannot claim that cost in an EMDG claim. If they'd spoken to me first, I would have helped them structure the arrangement from the outset, for instance by paying a fixed monthly retainer and then a bonus."

In one case, a business of mine ran a Kickstarter campaign to raise funds for a new product. Given over 90% of funds raised came from overseas backers, we were able to claim 90% of our spend on the Kickstarter video, website development and other press and promotional activities around the campaign.

Another misconception is that the grant is only available to incorporated businesses. If you are a sole trader with overseas clients, for instance a consultant or contractor, then your trips overseas to prospect for new business can be eligible activities.

Speak to CFOcus now for help in any of these areas.