Why an attractive grant can become a burden if a company fails to estimate its own contribution, cash flow and subsequent costs realistically
Article written by Emanuela Modoran – External Relations Expert & EEN Advisor, Măgurele Science Park Association
For many companies, the launch of a funding call provides the impetus needed to begin an innovation project that has been postponed due to a lack of resources. A grant worth hundreds of thousands or even several million euros can make it possible to develop a new product, build a prototype, purchase advanced equipment or test a technology under real-life conditions.
However, the enthusiasm generated by the value of the funding can obscure an essential question: can the company actually afford to implement the project?
The value of the grant is not the same as the value of the project and, even more importantly, does not represent all the financial resources the company will need. Its own contribution, VAT, ineligible expenditure, reimbursement delays and costs that continue after the project ends can turn a valuable development opportunity into a significant financial burden.
For this reason, co-financing is not merely an administrative requirement. It is a test of the project’s maturity and of the company’s genuine capacity to sustain it.
A grant does not mean that the money is immediately available
One of the most common misconceptions is that grant approval automatically provides all the resources needed for implementation. In practice, the financing mechanism may involve partial pre-financing, payment claims or the reimbursement of expenditure only after the company has already incurred and paid the relevant costs.
The company may have to pay salaries, suppliers, equipment, services and taxes before certain amounts are recovered. Weeks or even months may pass between making a payment and receiving the related funding, while requests for clarification, corrections or administrative delays may extend this period further.
Consequently, a project that appears financially viable on paper can create serious difficulties if the company does not have sufficient liquidity at the right time.
The analysis should therefore be conducted monthly, not only annually. It is important to determine when each payment must be made, how it will be financed and how long the company is expected to wait before recovering the relevant amount. An overall budget may appear balanced, while a monthly cash-flow forecast may reveal periods in which the funding gap becomes critical.
The actual own contribution is higher than the percentage stated in the funding guidelines
When a programme requires co-financing of 20%, 30% or 40%, companies may be tempted to regard this percentage as their entire contribution. In reality, the financial effort can be substantially greater.
In addition to the percentage applied to eligible expenditure, the company may need to cover:
- VAT, when it is ineligible or recoverable only at a later stage;
- ineligible expenditure that is nevertheless necessary for the project;
- differences between budgeted prices and the prices available at the time of purchase;
- costs exceeding the limits established by the programme;
- exchange-rate differences;
- interest and fees associated with bridge financing;
- expenditure rejected or corrected during verification;
- costs incurred before the eligibility period begins;
- commercialisation activities that are necessary but not included in the project.
The company’s actual contribution should therefore not be calculated simply by applying a percentage to the eligible budget. It should be estimated as the total amount of cash required throughout implementation and during the subsequent years.
For example, for a project with eligible costs of EUR 1 million and an aid intensity of 60%, the company’s contribution may not be limited to EUR 400,000. Once VAT, ineligible expenditure, financing costs and the investments required after the grant period are included, the financial commitment may increase considerably.
Co-financing must be demonstrated, not merely declared
In a funding application, it is relatively easy to state that the company’s contribution will come from reinvested profit, shareholder contributions or bank loans. It is much more difficult to ensure that these resources will actually be available when implementation begins.
Mature financial planning should provide clear answers to several questions:
- How much liquidity can the company allocate without affecting its ongoing operations?
- What proportion of the contribution will come from the company’s own resources?
- Is there a firm commitment from the shareholders?
- Is the company eligible for a loan, and under what conditions?
- Will bridge financing be required?
- What happens if reimbursement is delayed by three or six months?
- How will the project be sustained if the company’s current revenues decline?
- Is there a contingency reserve for unforeseen expenditure?
A bank comfort letter or a shareholder’s statement of intent does not replace a financial strategy. Before submitting an application, the company should hold concrete discussions with potential financiers and simulate several scenarios, including an unfavourable one.
The project must not destabilise the existing business
An innovation project is implemented alongside the company’s day-to-day activities. Employee salaries, supplier payments, taxes and existing contractual obligations continue even when the project consumes a significant proportion of the organisation’s resources.
This creates one of the greatest risks: the company secures the grant but ties up its cash and disrupts its core operations. A business may be implementing an ambitious project while simultaneously struggling to pay its employees or suppliers.
Before committing to the investment, the company must assess its ability to support both the project and its usual activities. This assessment should consider its current level of debt, profitability, revenue seasonality, ongoing contracts and exposure to other risks.
An innovation project should strengthen the company, not leave it financially vulnerable.
Costs continue after the funding ends
Another common mistake is to limit the financial analysis to the implementation period. Completing the project does not mean that the costs disappear. On the contrary, moving from a prototype to a commercial product may require considerable additional resources.
After the funding period, costs may arise for:
- equipment operation and maintenance;
- software licences, subscriptions and cloud services;
- consumables, energy and premises;
- retaining specialised personnel;
- additional certification and authorisation;
- protecting and extending intellectual property rights;
- adapting the product following testing;
- manufacturing the first production batches;
- promotion, sales and distribution;
- technical assistance and after-sales services;
- updates required to comply with new standards.
If these costs are not estimated from the outset, the company may complete the project with a high-performing prototype but lack the resources needed to bring it to market.
Future revenue should be estimated cautiously
Financial projections for innovation projects often assume rapid sales growth. In some cases, these estimates are based on the total size of the target market, without sufficient evidence regarding the number of customers the company can realistically attract.
There is, however, a major difference between interest expressed by a potential customer and a commercial order. Letters of intent, pilot projects and preliminary discussions are important, but they do not guarantee immediate revenue.
A realistic forecast must account for the duration of the sales cycle, certification requirements, customer integration, competition, production capacity and the resources required for commercialisation. For products intended for public institutions, critical infrastructure or highly regulated industries, the time required to secure the first sale can be considerable.
Companies should develop at least three scenarios: cautious, realistic and optimistic. The investment decision should remain sustainable under the cautious scenario, not only under the most favourable assumptions.
A sound budget follows the project’s technical logic
A budget should not be designed simply to absorb the entire available grant. Every item of expenditure must have a clear technical and commercial justification.
Equipment should be proportionate to the planned activities and its realistic level of use. Staff numbers and person-months must be aligned with the project tasks. External services should be included only when the required expertise is unavailable internally or cannot be provided efficiently by the project team.
An insufficient budget can make the objectives impossible to achieve. An oversized budget increases the company’s own contribution, financial exposure and the difficulty of justifying expenditure. Maturity lies in achieving the right balance between technological ambition and financial capacity.
Co-financing as an exercise in responsibility
Analysing co-financing requires the company to demonstrate that the project is more than an attractive idea adapted to a funding call. If the business is unwilling to invest its own resources or cannot explain credibly how it will cover future costs, the project may not yet be sufficiently mature.
This does not mean that only large companies can undertake ambitious innovation projects. SMEs can implement them successfully if they define a realistic project scale, select the appropriate development stages and secure their financing sources in advance.
Sometimes, the most responsible decision is to reduce the size of the project, divide the investment into stages or postpone the application until the product, market and financial position have been more thoroughly validated.
The grant should accelerate an existing strategy
The best project is not the one that receives the largest grant, but the one that can be implemented, sustained and transformed into a genuine economic result.
A grant should accelerate an innovation strategy that the company has already adopted. It should not artificially create an investment that the business could not otherwise afford. Co-financing, cash flow and post-project costs must be analysed as carefully as the technical solution, eligibility requirements and potential evaluation score.
Ultimately, the maturity of an innovation project is reflected not only in the quality of its technology, but also in the company’s ability to answer three simple questions: How much must we actually invest? When must the money be available? How will we sustain the results after the grant ends?
If the answers are clear and realistic, funding can become a genuine engine for growth. If they are treated superficially, even a generous grant can become a burden.
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