Business funding for software companies

A software company pays developers long before customers pay for the product, and has little physical security to offer a lender. It funds that gap with equity investment and R&D tax credits, and once it has steady subscription income, with recurring revenue finance lent against that income.

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What software companies raise money for

Software is built by people. Salaries for developers, designers and product staff are the largest cost, followed by cloud hosting, licences and the cost of winning customers. The product has to exist before it can be sold, so a young software company spends for months or years before revenue covers its costs.

A traditional lender wants security and a record of profit, and an early software company has neither. Its value sits in code, customer contracts and the team, which a bank cannot easily take a charge over and sell. The money for a young software business comes from founders, angel investors and venture funds, and debt arrives once revenue is recurring and predictable.

Subscription revenue changes the picture. Contracts that renew give a lender something to measure: recurring revenue, how much of it customers keep paying, and what it costs to win each new customer. The Budget on 28 October 2026 gave the British Business Bank £450 million to launch a new venture debt product for innovative firms.

Equity, revenue finance or a tax credit loan

Equity investmentRecurring revenue financeR&D tax credit loan
What you give upA share of the companyInterest and fees, and the loan is repaidPart of the credit in fees
What the funder studiesMarket size, team, growth and the route to a saleRecurring revenue, customer retention and cash runwayThe R&D claim and who prepared it
SecurityNone: the investor shares the riskA debenture over the company is a likely requestThe expected credit
SuitsHigh-growth companies before profitCompanies with steady subscription incomeCompanies with a regular R&D claim

Seed and Enterprise Investment Scheme limits at November 2026

£250,000the most a company can raise under the Seed Enterprise Investment Scheme
£10mthe most a company that is not knowledge-intensive can raise under EIS and other schemes in 12 months
£24mthe lifetime limit for such a company, with higher limits for knowledge-intensive companies
250full-time equivalent employees, the EIS ceiling when the shares are issued

Source: gov.uk venture capital schemes guidance, checked 3 November 2026

The seed scheme is for companies with gross assets of no more than £350,000 and fewer than 25 employees whose trade is less than three years old. EIS needs gross assets of no more than £30 million before the issue and £35 million after it. The October 2026 Budget announced technical changes to make both schemes easier to use, through Finance Bill 2026-27. Advance assurance tells investors before they invest that the company is likely to qualify.

R&D relief for software development

Software development can qualify for R&D tax relief where a project seeks an advance in computing science or software technology and resolves technical uncertainty that a competent developer could not readily resolve. Building a product with established tools and methods does not qualify by itself, however hard the build. The merged scheme gives a taxable credit of 20% of qualifying costs. Loss-making small and medium-sized companies whose qualifying R&D spending is at least 30% of their total spending can claim enhanced R&D intensive support, with a payable credit of up to 14.5% of the surrenderable loss.

Every new claim needs an additional information form describing the projects, sent no later than the company tax return. The October 2026 Budget removes the claim notification form from 1 April 2027. An R&D tax credit loan advances part of the expected credit before it is paid.

Debt or equity for £500,000

Illustrative example

A software company with £100,000 of monthly recurring revenue (£1.2 million a year) needs £500,000 to hire developers. It compares a revenue-based loan at an assumed 14% a year, interest only for twelve months, with selling shares at an assumed £4.5 million valuation before the money goes in.

Interest on £500,000 at the assumed 14% for a year
£70,000
Valuation after the equity round, £4.5 million + £0.5 million
£5,000,000
Share of the company sold for £500,000
10%
Value of that 10% if the company later sells for an assumed £20 million
£2,000,000
Cost of the loan for the year, before repaying the £500,000
£70,000

If the company grows as planned, the loan costs far less than the shares. If growth stalls, the £500,000 still has to be repaid from revenue, whereas an equity investor would have shared the loss. The equity dilution calculator runs your own numbers.

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What investors and lenders check

Investors and revenue lenders read the same numbers. Both want annual recurring revenue and its growth month by month, gross margin after hosting costs, and net revenue retention: how much last year’s customers pay this year after cancellations, downgrades and upgrades. A lender adds cash runway and the cost of winning a customer against what that customer pays over its life, because it is lending against revenue that has to keep arriving.

An investor adds the size of the market, the team and the route to a sale. Both read your customer contracts for term, notice and renewal, check that the company owns its code and the rights to anything built by contractors, and look at the cap table. Getting investor ready lists the documents to have in one place before the first meeting.

Founders’ tax and selling later

The Budget on 28 October 2026 announced Founders’ Relief: a 10% capital gains tax rate on up to £10 million of lifetime gains for qualifying founders of high-growth, innovative companies, from 6 April 2027, with the design subject to a technical consultation. Business Asset Disposal Relief charges 18% on qualifying gains from 6 April 2026, and its lifetime limit falls from £1 million to £500,000 from 6 April 2027. Selling your business and how much tax you will pay when you sell cover the personal side.

Founders who pay themselves a low salary can still build pension savings through the company, and director pensions explains how company contributions are treated. A relevant life policy gives a founder life cover paid for by the company.

Equity dilution calculator

Your shareholding after an investment round, from the pre-money valuation, the amount raised and any new option pool.

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Questions people ask

How do software startups get funding?

From the founders’ own money, then angel investors, often under the Seed Enterprise Investment Scheme or EIS so the investors get income tax relief, then venture capital as the company grows. Grants from Innovate UK can fund specific development projects, and R&D tax credits return part of the development cost. Debt becomes available once the company has recurring revenue a lender can measure.

What is recurring revenue finance?

It is a loan sized by your subscription income. The lender looks at annual recurring revenue, how much of it customers renew, growth and cash runway, and lends a multiple of monthly or annual revenue, repaid over an agreed term. It lets a company fund growth without selling shares, but the repayments come out of revenue whether or not growth arrives.

Does software development qualify for R&D tax relief?

It can, where the project seeks an advance in computing science or software technology and resolves technical uncertainty a competent professional could not readily resolve. Routine development with known tools and methods does not qualify by itself. Every new claim needs an additional information form describing the projects, sent no later than the company tax return.

Can a software company get a bank loan?

A profitable software company with a few years of accounts can borrow like any other business, and a lender may ask for a debenture and a personal guarantee. An early-stage company without profits or security will find bank lending hard, and revenue-based lenders, venture debt funds and equity investors are the more likely sources.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Funding by sector

Recurring revenue finance

Lending against subscription or contract income, for software and subscription businesses.

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Seed Enterprise Investment Scheme

A young company can raise up to £250,000 from investors who get 50% income tax relief.

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Enterprise Investment Scheme

A company can raise up to £10 million a year from investors who get 30% income tax relief.

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Venture capital

Venture funds buy stakes in companies that could grow very large.

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All business funding

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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