25.05.2016

Innovation jeopardised by a lack of funding 

Most of us have at least one good business idea in our lifetime. It can be something relatively simple such as changing the way that customer orders are queued for delivery or it might involve new technology that can revolutionise an established process, with far-reaching financial benefits.

Assuming that an inventor is contractually free to exploit those innovations, there is the small matter of IP protection to clear; securing a trade mark or registered design, perhaps, or a patent that can be rolled out under multiple jurisdictions. None of those routes is particularly cheap so many potential innovations fall by the wayside unless the rights are sold on to a business with deeper pockets.

Along the route to commercial reality, inventors have to gauge the size of their market, raise the necessary capital to support their development, and – more importantly – be able to secure the orders which will capitalise upon the ‘good idea’.

The funds to take that idea through development may be available from existing resources, but where does the money come from to pay for the materials and labour costs of financing any confirmed orders which emerge when the phone starts ringing? Invoice discounting – a popular way for SMEs to improve their liquidity – is not an option as there are no invoices to fund; neither is it an area in which traditional banks are comfortable.

Opportunity to increase crop yield

It is worth examining how one team with a particularly good idea got all the way to the finishing line, then had to clear the hurdle of financing the orders it was receiving.

An agricultural equipment distributor in East Anglia has been handling a range of machinery for a high profile manufacturer since 2002. One of the more popular lines is a system for planting maize seeds which should end the Summer as animal food or as the input to bio-digesters. It is capable of drilling and inserting 45,000 seeds to the acre, a density which ensures a good yield – subject to weather conditions – while leaving the maize plants far enough apart to be ‘dusted’ while they grow against pests that can wipe out 20% of a crop if left unchecked.

The distributor’s technical team identified a way to increase the density of sowing by at least 30% if the seeds could be treated before planting. They spent two seasons perfecting the process and the equipment needed to implement it. It involves brushing a microfine coating on the seeds in a rotating cylinder before they are dropped into the furrows.

Along the way, the company was awarded a grant from its local enterprise fund to build the prototype and finance the stages towards securing patent protection. One of the agricultural journals took up the story and that is when orders started to appear. Funding those orders, however, might have proved such a serious stumbling block that the initiative could easily have failed at that point.

The company’s bank felt it could not help as the system crossed the borders between innovation, development and production. Its directors were advised by the local manager, however, to approach the Trade & Export Finance (TAEFL) organisation for assistance.

Financing the manufacturing phase of orders

Fulfilling the growing order book involves sub-contracting the steel casing and delivery mechanism from a fabricator in the West Midlands, importing the rotary dusting brushes from the US, and assembling the system with its monitoring software in-house. Payment was required before production of the casing could start or the brushes imported. Having checked out the company’s track record and financial standing, TAEFL was able to organise the purchase of the brushes and commission the casing; retaining title to both until the complete systems are installed and payment received from the customers. For the orders in hand, funding totalling £74,000 was required.

As a direct result of TAEFL’s support, the equipment company’s customers should be able to increase their output by around 30% this year. That means 30% more revenue for farmers at a difficult time for the industry. The enterprise – a classic SME – is capitalising on its innovation skills and is busy searching out other areas of agriculture which could benefit from some lateral thinking.

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