Grant Funding and Debt Finance: Affordability of SME Net Zero Journeys
Small and Medium Enterprises (SMEs) are the backbone of the UK economy. In the private sector the 5.5 million UK SMEs account for 61% of employment and 51% of turnover.
This sector accounts for close to 50% of the UK business driven carbon footprint making it a considerable contributor yet there is no regulation to control emissions.
This leaves the choice in the hands of the business owners who are increasingly recognising that environmental sustainability is a must have.
Although lacking in regulation there are various government grant schemes available through local providers to help SMEs with Net Zero affordability. In this article, we delve into the pros and cons of these options, shedding light on the considerations SMEs must keep in mind when seeking financial support.
SME Grants: A Boost to Innovation and Growth
- No Repayment Obligations: One of the most significant advantages of grants is that they do not require repayment. This relieves SMEs of the financial burden of debt and interest payments, allowing them to allocate resources towards business development.
- Stimulates Innovation: Grants often focus on specific industries or technologies, encouraging SMEs to innovate and develop cutting-edge products and services that align with broader economic and societal goals.
- Enhanced Credibility: Securing a grant from a reputable source can enhance an SME’s credibility and reputation. It demonstrates external validation and trust in the company’s potential.
- Competitive Application Process: Grant applications are often highly competitive, requiring comprehensive proposals and strong justification for funding. Not all SMEs may succeed in securing grants due to the limited number of awards.
- Stringent Requirements: Grants often come with specific requirements, such as progress reporting, milestones, and compliance measures. SMEs must ensure they can meet these demands while continuing their operations.
- Limited Flexibility: Grant funds are typically earmarked for specific purposes, limiting their use to the outlined objectives. SMEs seeking general working capital may find grants less suitable for their needs.
Match Funding: Shared Responsibility, Shared Rewards
- Leverages External Investment: Match funding requires SMEs to secure a portion of the funding themselves, which can attract external investors or lenders interested in co-financing initiatives with growth potential.
- Mitigates Risk: By sharing financial responsibility, SMEs and investors or lenders distribute the risk associated with the project or initiative. This can make the endeavour more appealing to all parties involved.
- Encourages Diligence: Match funding encourages SMEs to carefully assess their financial needs, demonstrate commitment, and present a compelling case to attract external stakeholders.
- Financial Commitment: SMEs seeking match funding must contribute a significant portion of the required investment. This can strain cash flow or necessitate additional borrowing.
- Equity Dilution: In some cases, match funding may involve equity financing, resulting in SMEs giving up ownership stakes in their businesses to external investors.
- Complex Negotiations: Match funding agreements involve negotiations with external parties, which can be time-consuming and require legal expertise to ensure equitable terms.
Choosing the Right Path for Your SME
In the post pandemic economy SMEs are burdened with more debt than ever before. Bank of England figures show that the percentage of SMEs with a high debt to cash ratio increased from 12% to 32%.
Preserving liquidity is therefore paramount to SME owners. How does this balance with the required investment into Net Zero?
This is where high energy prices support the investment decision. Cornwall Insight predict that energy prices will stay high for the next decade meaning that business decisions on ROI and payback periods are long term.
Investment into renewable technologies provide a significant return if we can remove the requirement to tie up liquid cash in capital expenditure.
Accessing grant funding where available combined with debt finance for match funding requirements shows significant increase in cash for the SME from year 1 when acquiring most renewable technology assets.
In fact, for SMEs who can’t access grant funding the application of debt finance, removing capital expenditure, typically still shows a significant cash benefit from year 1.
The combination of the debt repayments with lower energy costs within the SME typically are significantly lower than current energy costs.
Debt Finance Options for Match Funding
Grant providers have strict regulations around the use of financial instruments for the use of grant funding meaning that asset finance and leasing can be problematical.
Good passing of title to the asset and proof of payment cause challenges from cash-flow perspective.
Hence loan schemes, such as the Green Loan Scheme launched by Future Leap Finance, are often a much better option. Unlike asset finance, loans can be drawn before the equipment is installed ensuring that the chosen retrofit supplier has their own cash-flow requirements maintained.
Green Loans also are appropriate for tenants of buildings that face challenges with legal requirements for asset finance and are well priced in a challenging time for rising interest rates.
Future Leap Finance can provide you with ethical finance options to support your Net Zero journey which are appropriate for match funding with your grant provider or can show your business how cash reserves can increase without grant availability.