By Mike Price, MD and Owner, MPA

As originally featured in Rail Director magazine.

Stimulating economic activity and driving long-term productivity through investment in our transport infrastructure is a core pillar in the UK government’s Plan for Growth. However, it’s also recognised that significant amount of private investment will be needed for the rail sector to deliver its part in that plan.

With that in mind, we look at three funding options for transport businesses – whether seeking more government aid or looking at ways to stimulate private financing.

Grants

Grants are an excellent way of getting funding into your business. However, the grants landscape is complex and ever-changing, and they’re notoriously tricky to obtain. The average application success rate is around one in ten.

That being said, if you have a ‘game-changing’ idea at an early stage, they’re still a very viable option and there are multiple types of grants available from different government bodies like Innovate UK.

Before embarking on applying for a government grant, you do need to bear in mind that they’re usually match-funded, so you’ll need the equivalent amount of your own funds before you can draw down this type of government aid.

It’s also important to weigh up the net benefit that receiving a grant will bring before applying; projects that have grant income against them likely won’t qualify for the most generous rate of Research and Development Tax Relief (though you may still be able to claim), for example. We’ve seen a simple £5k administrative support grant destroy £250k of R&D tax relief! Planning here is key.

EIS/SEIS

Enterprise Investment Scheme (EIS) is a way for individuals to obtain shares in a tax-efficient way. When investing in an EIS or SEIS registered business, an individual will receive 30% of their investment back in the form of tax relief.

Significant investment in an EIS registered business is really only attractive to individuals with a large annual tax bill (in excess of £75k), while SEIS (the ‘s’ stands for ‘seed’) is a junior scheme for smaller investors.

As EIS/SEIS is designed to reduce reliance on government funding through encouraging private investment, there is also additional relief available should the company fail within three years. An additional 40% or so of the investment amount could be reclaimed through tax relief for higher rate taxpayers in such an instance, meaning the investor would only pay 10% tax all told.

To set up a typical EIS/SEIS arrangement, a tax practitioner would be needed to help design a scheme and get HMRC approval, and a lawyer should be bought in to help ensure Articles are compliant and that a shareholder’s agreement is in place.

Angel Investment

The rate of return a typical Angel investor requires will likely make this the most expensive option mentioned here.

Angels can often seek a large equity stake that reflects their perceived risk; a paid Directorship, which allows them to exert some control; and for their investment given some priority, whether that’s through preference shares, first cut of dividends, or maybe a restriction on Founder cash until they’ve been paid.

They also invest in people and teams first, and products second, so are a good option if you have a stream of products or services in your development pipeline.

Although potentially expensive, if you can find the right Angel – someone who has passion, knowledge, and connections – they can accelerate your business at a much faster rate.

There are a number of Angel networks across the UK that can help connect you with the right person.

The Innovation Cycle

Grants are often most successfully won by ideas at an early stage, while seeking investment through EIS/SEIS and Angel investors is usually sought for scaling up, but these are just a few of the funding options out there.

Whatever stage you’re at, though, developing an innovation funding cycle that maximises all the funding options available will naturally push you to the stage of growth, allowing you to evolve as quickly as the rail sector itself seems to be.

Experts like MPA can help you find the right investment route, at the right time. Get in touch with our transport network specialists to discuss funding your next big idea.