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From EIS to crowdfunding, ways to attract finance beyond the bank
by Startacus Admin
Chris Conway is the MD of Accounts and Legala leading Small Business Accountancy firm based in London. Here he offers up explainers on both Enterprise Investment Schemes and Crowdfunding as ways to attract finance beyond the bank...
"Getting investment for your business is already tough enough without the risk of investors being deterred by scams or tax investigations. Investment schemes are scrutinised on a daily basis by financial regulators, HMRC and the media, but this doesn’t mean businesses should be put off from seeking funding.
For example, the murky world of film investment has come under the spotlight after Felix Vossen, producer of The Sweeney was caught by Spanish authorities over claims he had run off with money friends had given him to invest in movies.
It comes just a couple of years after a film partnership investment scheme called Eclipse 35, was shut down by HMRC after it concluded that the scheme, which had money from celebrities such as Sir Alex Ferguson, had no trading activity other than to avoid tax..
The case went all the way to the Supreme Court where last month judges upheld the taxman’s ruling.
All this can make investing in business opportunities seem dodgy and deter investors, but there are legitimate ways to attract finance beyond the bank with enterprise investment schemes or crowdfunding.
What are Enterprise Investment Schemes?
Enterprise Investment Schemes have become an increasingly popular way for small businesses and start-ups to raise funds from investors keen on tax reliefs and the possibility of a decent return.
Small firms have raised more than £42billion through the EIS since its launch in 2003 and 2,710 companies raised almost £1.7billion using the EIS in the 2014-2015 tax year, according to HMRC.
Start-ups have also benefited from raising external finance through the Seed Enterprise Investment Scheme, with 2,185 companies raising £168million last year.
The EIS and SEIS are attractive to investors as they receive income tax relief on their investment. Investors get 30 per cent relief on an EIS and 50 per cent on an SEIS to reflect the higher risk. So if they put in £10,000 into an EIS it costs just £7,000, or £5,000 in the case of an SEIS. Investors also pay no capital gains tax after the minimum of three years if the investment has grown in value.
Any losses can also be offset against their tax bill. Businesses have to be under seven years old to apply.
You will need to get ‘advance assurance’ from the Small Companies Enterprise Centre which considers applications on behalf of HMRC.
The company must also comply with the EIS rules for three years after getting investment. This means staying unquoted and not being controlled by any other company.
Businesses could go straight to the public for funds by harnessing the power of the crowd. Often you don’t need a lot of trading history, but you will need a viable business plan and repayment strategy.
Websites such as Seedrs or Crowdcube will let you pitch for investment in return for either a stake in your business, known as equity crowdfunding, or by paying interest on a loan, known as debt crowdfunding or peer-to-peer lending.
There are also other types of crowfunding where you could receive money in return for offering rewards such as discounts or free items.
You will need to open an account on a crowdfunding or peer-to-peer platform and provide a business plan so your pitch can be vetted before it is approved and sent out to possible investors."