May 9 2012 By Mike Parkinson, partner at accountants Barnes Roffe
Finding money is tough for businesses at the moment, tougher still for anyone starting out with a new venture and wondering how on earth to pay for it. But there are options worth exploring without relying on your not very local, or listening, bank manager.
Seed finance is oneroute, and it can come from friends and family. They will beparticularly useful in helping get through that 'valley of death'period as a business develops, but when income generated is dwarfedby costs. But you do need to be prepared to give up a stake.
Still,at least friends and family are likely to be more generous in whatthey demand back for their cash, and more flexible if things wobbleunexpectedly.Business angels are themore professional version of friends and family, providing money tostart-ups in return for equity and income. As any viewer of theDragons Den knows, business angels want to know how and whentheir investment will be repaid, and can be quite ruthless inleveraging their money into a significant holding.
They are notinvesting just because they like you. These are professionals, andthey will usually exact a high price in return for their support,believing that you may have nowhere else to turn. Angels spread theirbets, necessarily taking risks on untried enterprises.
They needrevenue from successful bets to compensate for losses from othersthat collapse into dust. It is a bit like record labels and bands:One that really ignites covers them for the dozens that turn out tobe damp squibs.
And then there is theGovernment. Well, sort of. Ministers are trying hard to make good ontheir oft-stated commitment to small businesses by making it easierfor them to get money from places other than banks. Investments cannow, since April, be made under the new Seed Enterprise InvestmentScheme.
This is designed to encourage investment by individuals incompanies that might otherwise find it hard to raise finance. Thescheme is focused on smaller, early stage businesses with under 25employees and less than s200,000 in assets. The company can obtainup to s150,000 of investment under the scheme.
In return, investorsget a generous tax relief if they subscribe or take shares and haveunder a 30 per cent stake. There is capital gains tax exemption ongains made in 2012/13 and reinvested in a Seed Enterprise InvestmentScheme, but only for this current tax year.
There is also capitalgains relief from gains made from seed companies. The scheme alsooffers tax relief of 50 per cent of the amount invested up to amaximum of s100,000 each year. Any unused investment allowance canbe carried forward a year. It is also available to directors whoinvest in their companies, but not employees.
Another option is theEnterprise Investment Scheme, which was designed by the Government toprovide investors with an incentive to put money in smaller, unquotedcompanies, and has been established for some time.
In tax terms, thiscovers most Alternative Investment Market and Plus quoted shares. Therules are similar to the Seed Enterprise Investment Scheme, althoughthe scale of company it is trying to help is significantly higher.This is available to companies with assets of up to s15 million and250 employees. Once again, the maximum stake anyone can take is 30per cent.
The tax relief is notas generous as with the Seed Enterprise Investment Scheme, but thelimits are higher: Income tax relief of 30 per cent up to s1 millioneach year; no capital gains payable on disposals after three years,and an exemption from inheritance tax after two years.
A company isallowed to raise up to s 5 million a year through the scheme. Thebottom line for a 50 per cent taxpayer is that if they invested s100into an Enterprise Investment Scheme venture which subsequentlyfailed, it would only cost them s35. Not bad.
The message to smallfirms is that it is not all about banks. There are other ways to findmoney, and good advisors should be able to point you towards them.
Mike Parkinson is a senior partner at London accountancy firm Barnes Roffe LLP, which specialises in helping small and medium sized businesses. He has more than 22 years of experience working with the hotel, retail and service sectors in the Greater London area. He is based in Uxbridge.