Alternative financing options for small businesses
There are plethora of options available to small businesses when it is related to financing. On the one hand, you have the traditional options like bank loans, investors and the employing of personal savings as against technology has generated the likes of crowd funding.
However, one of the best options to financing your small businesses is the Enterprise Investment Scheme, or EIS.
As a small business accountants in London, we are specialist in working with our clients to expand their business, and apart from that assists them in getting the finance they need to flourish.
Started in 1994, the Government believed EIS would prompt investing money in small companies by high-earning individuals which would have appeared to be riskier.
The scheme builds up a huge opportunity for small business owners and entrepreneurs as they can take advantage of the tax breaks related to the scheme so as to attract the investment they need or want.
The scheme provides investors a number of incentives and perks in return for investing in small businesses and startups.
Investors are provided income tax benefit in percentage with the cost of the shares they buy through EIS. In contrast, on selling of their scheme shares they make a loss on it, also they have the option to claim loss relief which not only curtail their tax bill but also highlights the minimized risk included in EIS.
EIS is tailored towards early stage, new investment in companies with low staff levels, turnover and assets, thus formulating the scheme essential to providing support to the creation and growth of business in the UK.
The 2011 Budget fostered the spirits for small businesses looking for funding as income tax relief on the EIS scheme which was raised from 20% to 30%, thus offering investors a much better incentive to invest, while also fostering the likelihood of small business to secure their funding.
As per 2011 Budget which propelled the enhanced incentives, the innovation foundation, NESTA have reported that according to 80% of the business angels surveyed had at once have invested through EIS, which clearly indicates the attractiveness of the scheme in actual.
In addition, EIS has offered extra pounds for early-stage companies as compared to the venture capital industry on a frequent basis; at one stage offering twice as per NESTA.
As a form of EIS, a business can obtain up to £500,000 from an individual investor in a given tax year as while largely a maximum annual investment of £5m through the scheme they accept and a total of £12m in the company’s lifetime.
In 2014/15, a total of 29,380 investors claim an income tax relief for just over £1.3bn. This provides a large average investment amount of only under £44,500.
The extensive majority of trades are entitled for EIS investment, so the higher likelihood exists that your firm will be entitled, too.
Only a few trades are exempted—these involve coal and steel, shipbuilding, property development, farming and accountancy.
Qualified companies must be situated in the UK and does not regulate another company other than entitled subsidiaries. Moreover, an entitled company must not be regulated by another company or another company owns more than 50% of its shares.
An entitled company and its entitled subsidiaries must not have gross assets exceeding £15m before EIS investors issues any shares, and the gross assets must not be more than £16m immediately after issuance of shares.
Lastly, the business must have lesser than 250 full-time employees when the shares are issued.
Although the vast number of companies are entitled for the scheme, it’s important to keep in mind that there could be a number of restrictions.
For example: you cannot obtain EIS investment if you’re quoted on the London stock exchange, or regulated by a bigger firm.
Moreover, the scheme is meant to assist companies modify their existing trade; if you wish to use the EIS investment to enhance the nature of your business, you possibly won’t get the funding.