When seeking finance for your business (apart from a gift or a grant) you really have only two options and they are debt or equity. Actually all banking instruments are also made up of the two same basic components (and sometimes combinations of the two) so it is a good place to start.
The decision of which one to choose has a lot to do with the stage of your business and what you want the finance for. Debt (or a loan) is the type of financing that your bank manager is interested in. If you have an established business with reliable cash flows and an asset or two that the bank manager can rely on, should the business take a turn for the worse, then a loan from your bank manager will be the simplest and quickest way of accessing finance.
However if you are an early stage or even pre revenue business (no customers and no income) then it is your credit card or equity finance that will realise your dream. At this stage your best bet are friends and family or a business angel and to make the investment a little more tempting to the investor the government has sweetened the deal (subject to a limited set of conditions) with some fantastic tax advantages. The scheme is called Seed EIS and although it sounds like something you pick up at your local gardening centre it does have the potential to help your business grow.
The company raises money in the normal way but advises the HMRC that they are taking advantage of the scheme and once the HMRC confirms that the conditions are met the investor is issued a certificate to inform their tax collector and receive the tax saving.
The basic company conditions are:
- The company must not be quoted on an exchange (which is normal for a small business)
- Have less than 25 people and £200,00 in assets
- Want to raise up to £150,000
- Be less than 2 years old
- Have not already raised money using another scheme such as SEIS’ bigger brother EIS or a VCT.
The basic investor conditions are:
- The investor receives ordinary shares
- Is a UK resident
- Pays for them in full
- Has less than 30% of the capital and voting rights
- Is not employed by the company
Under the scheme the investor can immediately claim relief (a deduction) of 50% of the investment from their income tax on their return. And if the investor holds onto the shares for at least 3 years then profits are free of Capital Gains Tax. Finally if the investment fails your can claim further relief against income tax of the initial investment less the 50% claimed multiplied by your tax rate. If you are a 45% taxpayer then the most you can lose is 27.5% of your investment.
If as a company you are looking to raise equity finance up to £150,000 then there is little point not looking to use Seed EIS. The HMRC allows companies to gain what they call advance assurance which means that the company and the capital raising is pre authorised by the HMRC. Allowing you to approach investors with the tax saving built in.
Please call Webworks on 020 8144 4474 for more information