In Focus: Rural business grants and funding

• To maintain economic growth in rural areas, the provision of capital and revenue grants acts as a stimulator for increased productivity and aids innovation;
• The Rural England Prosperity Fund (REPF) replaced the previous EU rural development funds with the UK Shared Prosperity Fund (UKSPF) replacing the EU regional and social funds;
• Delivery of the REPF has been patchy, leading to inconsistent approaches and problems in fully spending REPF budgetary allocations;
• There are a variety of different rural business grants that cover, diversification, innovation in new products and business start-ups;
• Applicants for rural business grants must ensure that they meet the eligibility requirements as well as other grant conditions;
• Grant values can vary widely, often depending on the objectives by the respective local authorities;
• All grants will require an element of match funding, the level of private investment depending on the objectives being pursued;
• Financial loans are available from traditional sources, such as the retail banks, in addition to loans from the British Business Bank.

For rural businesses to grow, they will often require funding. This could be in the form of grants or loans. History shows that rural businesses are resilient and have recognised business opportunities through diversification. However, to be able to exploit these opportunities, they require public support to develop further.

This In Focus article explains the different types of grants available within the present UK Government grant schemes. In addition, it explores several different funding streams that allow rural businesses to expand.

When the UK was a member state of the European Union it was allocated funds towards furthering rural development. During the final Rural Development Programme for England (RDPE) it was allocated £350m over a seven year period (2014 – 2020), that is £50m per year.

These funds were targeted towards two different programmes: the Growth Programme and LEADER. The Growth Programme was targeted towards larger projects with a minimum grant value of £35,000. For LEADER, projects were more socio-economic in character with a maximum grant limit of £35,000.

The UK Shared Prosperity Fund (UKSPF) replaces the EU’s structural fund through the regional and social fund schemes. It is UK-wide with a budget of around £800m per year. It is a revenue grant scheme (not capital) and is targeted mainly for disadvantaged areas that were previously Objective 5b areas, such as Cornwall and large parts of Wales.

Rural businesses are eligible to apply for revenue funding but experience has seen that this tends to be an untapped resource although it can be difficult to access. As with the Rural England Prosperity Fund (REPF), it is administered and delivered by local authorities. Importantly, many local authorities have joined the UKSPF with the REPF which can create confusion as to which grants are available.

Following the UK’s exit from the EU, the government decided to the available rural development budget to create a new capital grants scheme for rural business and community projects. The REPF went into operation from 1 April 2023 for a two-year period, ending on 31 March 2025, worth £110m over this period. Whereas under the RDPE, funds were allocated and delivered centrally through the Rural Payments Agency, the REPF is a devolved scheme involving some 117 local authorities in England. Each local authority has been allocated a budget and this is set out in Annex 1 below.

This change in delivery and administration has caused a number of difficulties, mainly due to 117 different approaches being undertaken by the respective local authorities. Although Defra set out guidance on the priorities and aims of the REPF, many local authorities have been bedevilled with problems in failing to understand the needs of rural businesses and, in a wider sense, a failure to understand the rural economy.

Nevertheless, several different grant schemes, targeted at different types of project, have been launched and these are explained below.

It is important to understand that there are different types of business grants available. This means that together with different objectives, there are different criteria that apply. When we look at rural business enterprise grants they can cover a range of different business types including:

• Existing tourism businesses seeking to expand, for example, building new self-catering units;
• New and existing businesses that are looking to develop new products for market that involve innovative processes and technologies;
• Businesses in niche markets, particularly those seeking to open up new markets.

The projects for which the grant might be used for include:

• Manufacturing activities and equipment;
• Purchase of equipment for food processing for non-farmer-owned businesses only;
• New builds/converting /altering buildings to other uses, for example, manufacturing/office;
• Creation and improvements of leisure/tourism businesses - adding value to the visitor experience.

It is important to note that grants of this nature will need to be match funded. This means that the value of the grant will not cover the cost of the entire project but a certain percentage, usually in the region of 40% or 50%. As such, the business will have to match fund the remaining cost. For example, a project costs £80,000. The grant value is 50% or £40,000. The match fund is therefore 50% or £40,000.

A number of local authorities are putting in place start-up grants that help diversification and new projects the ability to start trading. These grants can vary in size, usually between £2,000 and £5,000 and are normally targeted at small, micro and sole traders. These are businesses with less than 49 employees.

The actual provision of start-up grants very much depends on the objectives and investment plans of local authorities. In general, provision will be made to support micro and sole trader start-up businesses. Applicants for start-up grants, where they are available, need to ensure that they meet all the eligibility criteria.

Since the big government push in 2001 to encourage greater diversification, more and more rural businesses have recognised the importance of this route. In the main, rural diversification has tended to focus on tourism projects which can add a further income stream to the main business operation.

However, rural businesses are expanding their operations into other diversified sectors, one such being outdoor events like wedding venues and functions. A diversification grant can be a great assistance to these types of diversifications but it is important for all applicants for these grants to ensure that the value of the grant is sufficient for the proposed project given that funding is for capital works only.

As noted above, rural business grants do not cover the total cost of the project but will require match funding. There are a number of other conditions those seeking business grants need to consider, including:

• An application can only use one type of grant for a project. For example, an application can be made for a rural business diversification project but it cannot then apply for another grant from another source for the same project. This is known as “double funding” and is not permitted;
• The proposed project must take place in the location of the respective local authority. An applicant is not able to apply for rural business grants outside of their local authority boundary;
• Those applying for a grant will, in most cases, have to complete an ‘Expression of Interest’ which will then determine whether the applicant will be asked to put forward a full application;
• It is important that anyone seeking to apply for a rural business grant seek advice from their local authority (through the website) to ensure that firstly, grants are available and secondly, to make sure that they are eligible.

Rural businesses should not just rely on grant funding to expand operations but also look at other types of funding streams, such as business loans. Apart from loans from high street retail banks, the British Business Banks identifies 12 different finance types as follows:

• Angel Investment: These investors act as mentors and invest their own money in early-stage businesses for a share in the company;
• Venture capital where investment is made in businesses with high growth potential;
• Equity crowdfunding where investors through a digital platform buy shares in a business to enable business growth;
• Private equity: This is where existing private equity companies invest in established businesses in return for a large or controlling stake to help the business reach the next level of growth;
• Overdraft: Many rural businesses already use a bank’s overdraft facility where interest is paid on the overdraft amount;
• Term loans: This is where a business borrows from a loan provider, such as a bank, and where the loan is paid back over an agreed fixed term with interest;
• Start-Up loan: These are backed by the government and assist those beginning new businesses;
• Asset-based lending: Finance is secured against the existing assets, such as machinery and property that acts as collateral;
• Invoice finance: This is where businesses borrow against unpaid invoices, which provides funding before the invoices are paid;
• Peer-to-Peer lending: This is where finance is provided over the internet. Both the loan and interest are paid back over an agreed period;
• Leasing and hire purchase: Businesses buy assets and pay back over a fixed period;
• Mezzanine finance: This is where businesses access unsecured loans – these will be a mix between equity and debt financing.

Anyone seeking funding from alternative finance streams and providers should always seek professional financial advice.