## **Learning Outcomes**

After reading this article, you will be able to explain the purpose and types of government support and grants available to businesses. You will identify typical eligibility criteria and outline how such assistance can impact business finance decisions. You will also be able to evaluate government schemes in exam scenarios and carry out basic calculations relevant to financial management.

## **ACCA Financial Management (FM) Syllabus**

For ACCA Financial Management (FM), you are required to understand the role of government assistance in business finance. In particular, you should focus on:

- The types of government support and grants available to businesses
- Eligibility and application criteria for government financial assistance
- The financial impact of grants on cash flow and investment decisions
- The role of government intervention in easing SME financing problems
- Approaches to assessing alternative sources of short-term and alternative finance

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the main financial benefit to a business of receiving a government grant for a new investment project?
2. Which of the following statements about government grants is TRUE?  
   a) Grants usually need to be repaid in full  
   b) Grants are often awarded based on strict eligibility and project assessment  
   c) Grants always cover the entire cost of a project  
   d) Grants are available only to large businesses
3. Briefly explain one common condition attached to government business grants.
4. How do government loan guarantees reduce the risk for banks lending to SMEs?

## **Introduction**

Government support and grant schemes are an important source of alternative finance for many businesses, particularly small and medium-sized enterprises (SMEs) that may have limited access to traditional funding. Such assistance is usually designed to address gaps in the market, support specific economic objectives, or encourage investment in particular sectors or regions. Understanding these options, their features, and their impact on business decisions is a key part of ACCA Financial Management (FM).

> **Key Term: government grant**  
> A payment from the government or public body to a business, usually for a specific project or purpose, that does not normally require repayment provided agreed conditions are met.

## Types of Government Support and Grants

Government support for businesses comes in several main forms:

- **Direct grants:** Non-repayable funds or payments awarded for defined purposes, such as capital investment, R&D, or job creation.
- **Loan guarantees:** The government shares risk with lenders by guaranteeing repayment of a percentage of a business loan if the borrower defaults.
- **Tax incentives:** Reduced tax liability or credits for carrying out certain types of activity (e.g., R&D, capital investment, hiring staff).
- **Subsidised loans:** Loans offered at below-market rates, typically supported by public bodies.
- **Advice and support services:** Access to business planning, export advice, and training, often provided through state-funded agencies.

### Key Characteristics of Grants

To qualify for most grants, businesses must meet eligibility criteria, which may include size, location, commercial sector, or project objectives. Many grants are competitive and offered for a limited period or until available funds are exhausted.

> **Key Term: eligibility criteria**  
> Specific conditions determined by the grant provider that a business or project must satisfy to receive government support.
>
> **Key Term: matched funding**  
> A requirement that the business provides a portion of the project funding from its own resources in addition to the grant awarded.

### Typical Grant Conditions

- Use of the funds strictly for the approved purpose (e.g., machinery purchase, staff training)
- Achievement of certain targets (e.g., number of jobs created, measurable output)
- Submission of evidence and documentation
- Non-receipt of multiple grants for the same expenditure (“no double funding”)
- Clawback provisions if conditions are not met (in some cases requiring repayment)

### Application and Award Process

The grant process generally involves:

1. Preparing a business plan and grant application
2. Submission to the relevant government department, agency, or funding body
3. Assessment based on eligibility, project merit, and anticipated impact
4. Notification of award and agreement of terms
5. Project monitoring and reporting requirements

Funds are usually paid in instalments or on completion of milestones.

### **Worked Example 1.1**

A company plans to invest £100,000 in new equipment. It is eligible for a regional government grant covering 20% of the investment, subject to creating two new jobs. The remaining 80% must be funded by the business. Calculate the amount the company needs to raise from other financing sources and briefly state why the grant may help the company obtain a bank loan.

> **Answer:**
>
> - The grant covers £20,000 (20% × £100,000); the company must raise £80,000.
> - The grant reduces the company’s cash outlay and improves project viability, making it more attractive for banks to provide the remaining finance.

### Government Support for SMEs

SMEs often struggle to raise finance due to a lack of track record, limited collateral, or smaller funding needs. Governments respond with schemes such as:

- **Loan guarantee programmes:** The state guarantees a portion of the loan, reducing risk for lenders and increasing access for SMEs.
- **Direct grants for startup or growth projects:** Funding allocated for innovation, expansion, or export development.

> **Key Term: loan guarantee scheme**  
> A government arrangement in which the state underwrites a portion of a bank loan to a business, reducing lender risk and improving SME access to credit.

### **Worked Example 1.2**

A small business lacks property to secure a £50,000 bank loan for expansion. The state offers a loan guarantee scheme covering 75% of the value. What is the maximum amount of loss the bank could face if the loan defaults? What is the main benefit to the business?

> **Answer:**
>
> - The bank’s actual risk exposure is £12,500 (25% of £50,000); the rest is covered by the guarantee.
> - The business can access loan finance it otherwise might not obtain due to insufficient collateral.

### Common UK Examples (for Reference)

- Regional Growth Fund/Regional Selective Assistance (supports investment in disadvantaged areas)
- Enterprise Finance Guarantee (provides loan guarantees)
- R&D Tax Credits
- Coronavirus Business Interruption Loan Scheme (CBILS), Bounce Back Loan Scheme (COVID-19 response)
- European Investment Bank/EIF (for innovation and environmental projects)

### **Revision Tip**

When assessing a grant or guarantee in an exam scenario, always check:

- Whether any matching funds or co-investment are required from the business
- If the grant is taxable income or exempt for corporation tax purposes
- Whether the expected cash flow timings fit the business’s needs

### Financial Impact of Government Grants

Receiving a grant can:

- Lower the initial cash outflow for new projects
- Improve investment appraisal results (e.g., higher NPV, shorter payback)
- Reduce the need for expensive borrowing
- Improve liquidity and potentially increase access to further finance

However, reliance on grant funding can bring uncertainty. Not all applications are successful, and some programmes end without notice.

### **Worked Example 1.3**

A company appraises a project costing £120,000. Without a grant, the project NPV is negative (£4,000). With a £30,000 grant, the revised NPV is positive (£10,000). Should the company proceed if the grant is received? Why is it important to check all grant terms before starting work?

> **Answer:**
>
> - With the grant, the NPV turns positive; the project is financially viable only if the grant is secured.
> - Businesses must ensure grants are formally approved and terms are met before incurring costs—otherwise, they risk losing both the grant and their own investment.

### **Exam Warning**

It is a common error to include anticipated grant income in a project appraisal without verifying eligibility or award status. Only guaranteed funding should be factored in.

## **Summary**

Government grants and financial support are valuable short-term and alternative funding sources. They can make projects affordable, especially for SMEs. Eligibility criteria and application requirements are strict, and grants often require a co-funding contribution. Understanding the criteria, process, and financial effects of government support is critical for business and ACCA FM exam success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Identify and explain the main types of government business support and grants
- Understand typical eligibility and application processes for grants and support
- Describe the role and financial effects of loan guarantees for SMEs
- Assess the impact of grants on investment decisions and cash flow
- Recognise exam pitfalls when considering government support in calculations

## **Key Terms and Concepts**

- government grant
- eligibility criteria
- matched funding
- loan guarantee scheme

Short-term and alternative finance - Government support and grants