678 sources of free funding for small business growth
First let me say the title of this article is utterly preposterous. If anyone can find 678 real free funding sources for small business growth, I’ll join Professor Jim Al-Khalili, in eating my boxer shorts on live TV. Yet it is only a slight exaggeration of the kind of statement I regularly read and hear business advisors make. They are trying to fool you into believing they can offer free funding to help you grow your business. With the exception of a very few niche, largely government-regulated schemes this is untrue. Only a tiny fraction of the small businesses based in and around Cambridge could ever qualify for these sources of funding. So what is the reality of small business funding as we move into 2012?
Warning this is an intense article, longer than our standard postings. We have included additional detail as this is such a critical moment for funding for small business. You may have seen our campaign for better local business and as government small business funding is being decimated, we think local businesses deserve the truth about what business funding is on offer and the hidden costs of “free” small business funding.
Funding for small business experiment
If you type into Google something like small business funding, or small business grants, after the paid ads for factoring and loans, your 160 million plus results offer sites suggesting they offer impartial advice on how to fund your small business. Click on one and you may be surprised by the number of adverts from banks. Is it possible to be give impartial advice on funding when you existence is funded by individual banks? Regardless of any bias, many of the sites offer information on free funding for small business. So just how free is this money, and is it real funding?
How to access small business funding
Some sites offer handy business funding search options. Surprisingly, many of the funding options were bank-sponsored competitions (note competition, not free funding) and details of any funding are hidden behind pay walls costing upwards of £50 for ‘membership.'
We tested small business funding sources for a typical Bizfix client. They are a local company, employing a handful of staff, in their second or third year of operation with a turnover of a few hundred thousand pounds per year. In this scenario, we used the example of a technology company designing bespoke software, but the results would apply to almost any business sector in Cambridgeshire.
We ran our search, and of the few that do lead to government sources of funding rather than competitions, many have highly restrictive criteria that are likely to exclude the vast majority of small businesses from even applying.
The most important source of small business funding
One of the largest and highest profile schemes is the Business Coaching for Growth Scheme, which will be launching in January 2012 from the Department for Business Innovation and Skills. To be eligible you have to fall into the category of:
- Established SMEs with the potential to increase employment or turnover by 20 per cent or more each year for three years
- New start-ups with the potential to become “gazelles” i.e. the potential to achieve turnover of £1m within three years of starting trading, or to have at least 10 employees within three years.
That’s three specific criteria to achieve within 3 years of starting trading:
- turnover of £1 m
- employ 10 people
- 20% growth year on year for three years
Does your small business qualify for funding?
Now lets put this in context. If you started with a turnover of half a million in your first year, assuming 20% growth each year you would not meet the eligibility criteria for this scheme. If you started off employing 4 people in your first year and increased employment by an additional 50% each year, you would not meet the eligibility criteria. If you started off with a turnover of £300,000 in your first year, and you raised turnover by £95,000 every year over three years would not meet the eligibility criteria for this scheme. In fact according to the Government’s own figures while nearly 70% of all small businesses want to grow, only 20% of them will achieve any growth at all.
(Source: Annual Small Business Survey, 2007/08, BIS 2009)
But assuming you do qualify for this programme, let's take a look at how it works in practice in the East of England. Small business owners are offered an initial ‘master class,’ four half-days of support and ‘if progress is good, up to four further half days of support.’ The East of England providers site states: ‘Due to public funding, each block of 2 days of coaching costs just £250 +vat.’ So there appears to be little by way of free cash here to develop your business.
European funding for small business
There are a number of European-based funding schemes, but these are disappearing by the day and are often for such high tech innovation, research and development, or environmental schemes, that again most local companies are excluded from even applying. And if we look closer to home, three popular funding sources are closing and they ask for
matching funding from your business, rather than offering free money.
- Train to Gain to improve businesses basic skills in numeracy and literacy: closed July 2011
- The inauspiciously named Beyond 2010 programme closes on 31 December 2011, provides ‘up to 70 per cent of the cost of training’ and is available from EEDA and the European Social Fund, i.e. you need to find a minimum of 30% of any training yourself.
- The Low Carbon Innovation Fund is available to 2015 to businesses with an operational base in the East of England and they provide up to 40% of funding (you must provide a matching 60%). This can be used to develop 'new and innovative products or processes in a low carbon, environmentally sensitive manner.' It goes on to say: 'This could include those developing alternative energy sources or reducing existing carbon emissions amongst others.' (see update below in comments)
Now these are all great schemes, nothing wrong with them and nothing wrong with part funding. But these kinds of funds are only likely to be suitable for a infinitesimally small number of local businesses (how many small business owners do you know that are in a position to develop 'alternative energy sources,' and what’s more they are clearly not sources of free funding.
Other sources of funding for small business growth
There are indeed other sources of funding. Foundation East for example is “A membership organisation that provides small business loans of up to £50,000.” As an alternative to banks that is a great idea, but a click on their FAQ page tells you that the interest rate charged on loans is 'Typically 20.7% APR' which is nearly three times the rate that’s on offer from banks. The rate is so much higher because they are lending to businesses that may have been turned down by banks and so are a higher credit risk. It’s not that these sorts of schemes are bad: it’s just that this is so far from the free funding as promoted by many advisers, that their claims are just plain poppycock.
Business Link small business funding
Finally, we headed over to the new Business Link website, and entered into their Business Support Finder tool that we were looking for funding to ‘grow and sustain’ a limited company based in the East England and operating in the IT sector. It generated 98 options. We won’t bore you with all of them, but here are the first nine.
1. Offers us a loan of between 6% and 10% with additional fees of 1% – 2% i.e. not free small business funding
2. Will supply us with an academic scientist to work alongside our company, and up to £2,000 research funding, which could be relevant for a minority of businesses but not our small technology example here
3. Offers help in cutting our carbon emissions. Again given the small office-based work our sample company does, this would not be the highest priority
4. Suggests assistance with 'aspects of the performing arts, visual arts and literature.' They may like to sing in the office, but our sample business probably doesn’t qualify for this
5. Offers 0% loans (hurrah) but only to purchase energy efficient equipment (so if we owned the building we were in we might borrow for a more energy efficient boiler, but this is not much use to us as our sample company is merely a tenant and again it is a loan not free cash
6. Will give a scholarship to train a craftsman or woman – not relevant for our sample company
7. Offers help to improve employee relations – as our sample company only employs a couple of people and they get on like a house on fire, not so much use to them
8. Will help our sample company employ a graduate for a year although I have to pay them a salary to do so. This is just extra cost and one our sample company does not need right now
9. Offers our sample company a one-day training session on how to write a business plan and a loan at 12% with a 2% arrangement fee. This is also not relevant and the loan is expensive.
Real free money?
So from our starting point of 678 sources of free funding, we actually find very little that is relevant, almost nothing that is free and certainly no pool of free cash for anyone wanting to start or grow a business. This may not be a bad thing. Free does not always equate to satisfactory quality, and as we all know there is no such thing as a free lunch. There definitely are schemes out there that can help you grow your business; there definitely are some tiny pockets of money you may be able to call on to develop specific aspects of your business; but if anyone offers you free money to start or grow your business - you might just want to stop and think ... is there really such a thing as a free lunch?
For more information download our eBook: Big funding for small business. Given the nature of this article you might be wondering why we offer all our eBooks for free? Well we do have a vested interest in a thriving local business community, that is doing sufficient business to maintain our economy and if a handful of those local companies want to call us in to help them solve a business problem or to grow their business at some point in the future then that's all we need. So in this regard, it really is free to you today.
