Importance of Funding
The impact of innovation is visible in many aspects of life – but what ensures that innovative ideas can become realities? Funding.
It has been shown that the amount of funding and resources committed to an area directly affect the development, quality, and services related to the areai, ii, iii. For example, the funding given to education is directly related to the quality of education and academic achievement. Three studies by PwC found a statistically significant positive relationship between capital investment and pupil attainmentiv, v, vi. Similarly, increased funding towards healthcare increases the quality of care given – increased spending on hospitals, drugs, and public health have been linked to improved public assessments of the system. However, simply increasing funding is not the answer as funding in other areas has shown varying outcomesvii .
The mechanism of funding and the appropriation of funds is just as important. According to The Kings Fund, a strategy is needed for appropriate spending to maximise the benefit on healthcare of available fundingviii. This is equally true for education, a report by The Heritage Foundation concludes that strategies for resource allocation are imperative is improvements are to be seenix.
Therefore we can conclude two things: firstly, funding is needed to improve products, services, and technologies and secondly, it is only beneficial if regulations are in place to ensure that the funds are used appropriately to maximise their value.
How does this work for Businesses?
Similar to public services the quality of product or service a business can provide is dependent on its financial situation. A business without appropriate funding sources will be drown in a sea of debt. Funding is the fuel that powers a business. A business can take different avenues and channels to attain funding, often numerous channels are used. The type of funding chosen is dependent on the business type, the current situation of the business, and the direct that the owners are intending to grow.
What is funding used for?
Seed Money – is required to get the business running, it can be used for materials, websites, and office supplies. Seed money can come from an investor, a small business loan or the owner's savings account.
Cash Flow – the day-to-day expenses of a business need to be met. Salaries, bills, insurance, amongst other things must be paid. The initial period of a business generates low revenue, hence requiring funding.
Expansion – when a business begins to grow new locations, products, and market research may be required. These activities add to existing costs and need additional funding.
No matter which stage the business is funding or what source the funding comes from, it will not be an unlimited amount. There are always constraints that limit funding potentials. Therefore, modern funding mechanisms have incorporated providing guidance and coaching alongside funding. This is proven to be a necessary step to ensure that the funding is properly utilised for optimal outcome.
Where can Businesses go for Funding?
Venture capitalists (VC) is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. There are a number of different types of business loans, including bank loans, mezzanine financing, asset-based financing, invoice financing, microloans, business cash advances and cash flow loans.
Crowdfunding/crowdsourcing is the practice of funding a project or venture by raising monetary contributions from a large number of people, usually supporters of the technology. Crowdfunding is a form of crowdsourcing and of alternative finance. In 2015, it was estimated that worldwide over $34 billion was raised this way.
Government schemes are set up by governing bodies that are aimed to promote businesses in a specific field or area of research. Public funding for private companies has been a divisive topic. However, it is the availability of public funding schemes that have made innovative solutions a possibility in many cases. The SME instrument is an example of this.
The SME instrument is designed to enable business to transition to market or expand a concept with essential funding and coaching. It is structured into 3 phases; each phase ensures that projects maintain focus and achieve well defined objectives. For more information about the SME instrument please click here.
Dr Muhammad Adeel Irfan
R&I Funding Specialist
i Rosenbloom JL, Ginther DK, Juhl T, Heppert JA (2015) The Effects of Research & Development Funding on Scientific Productivity: Academic Chemistry, 1990-2009. PLoS ONE 10(9): e0138176. https://doi.org/10.1371/journal.pone.0138176
iv PricewaterhouseCoopers (2003) Building Better Performance: An Empirical Assessment of the Learning and Other Impacts of Schools Capital Investment: DFES Research Report 407, March 2003
v PricewaterhouseCoopers (2007) Building Schools for the Future: Technical Report: Appendix E: Literature Review: http://www.teachernet.gov.uk/management/resourcesfinanceandbuilding/bsf/
vi PricewaterhouseCoopers (2010) Evaluation of Building Schools for the Future (BSF): 3rd Annual Report: Final Report February 2010: http://www.teachernet.gov.uk/management/resourcesfinanceandbuilding/bsf/
xi Does Spending More on Education Improve Academic Achievement? Dan Lips, Shanea J. Watkins, Ph.D., and John Fleming Backgrounder Sept 8, 2008