Non-Traditional Ways To Finance Your Business

Raising funds is always a topical issue and most people exhaust the usual avenues fairly quickly, i.e. family and friends, bank loans, leasing and hire purchase, re-mortgage of home and investing in business (remember to claim the tax relief on the interest element of such loans on your personal tax return). 

A number of businesses with regular debtor customers also use asset finance products such as Confidential Invoice Discounting (CID) to fund working capital. 

For the uninitiated, this is effectively where you “sell” your debtor book on to an invoice finance company the day you raise the invoice and typically get 75% up to 95% of the debt paid immediately with the balance when the customer settles the original invoice. 

You pay a funding charge for the advance and also usually a monthly administration fee. However, more people are turning to slightly more unusual methods of funding. 

Two of these EIS/SEIS schemes and Crowd Funding are set out in more detail below:

EIS/SEIS 

The Enterprise Investment Scheme (and its newer derivative Seed Enterprise Investment Scheme ) was specifically designed to help smaller trading companies raise finance. Because these investments tend to be higher risk, there are attractive tax breaks for investors and these include:

• Income Tax – 30% relief up front on investment made.
• Capital Gains Tax – tax free capital growth (if held for a minimum period), tax deferral on earlier gains and loss relief if business fails.
• Inheritance Tax – up to 100% IHT relief on death.

There are a number of conditions attached to the schemes, i.e. needs to be a qualifying trade (some trades like accountancy or property development do not qualify), investor needs to be a qualifying person and cannot hold more than 30% of the issued shares or be an employee of the company. 

The same principles also apply to the Seed EIS, however, this is mainly for much smaller businesses but the upfront tax relief is at 50%. Careful advice needs to be taken at every stage, since if something is done inadvertently to change status of the company, the tax breaks are all lost and you will have very disappointed investors! 

When you “double up” the upfront relief and 28% CGT deferral, an investor may only actually spend 42 pence for very £1 they invest and if the company fails may actually only lose 25 pence for every £1 invested, hence making the risk quite attractive if the upside gain is good. These schemes should not be overlooked, therefore, when used in the right manner, they can be used to raise additional funding for a business. 

Crowd Funding 

This is a relatively new phenomenon and is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet. There are a number of quite large national platforms and scheme sponsors where you can obtain advice and some people try to create their own investment sites. It is a pretty unregulated market and, therefore, care should be taken as often scheme sponsors do no due diligence on an investment so risk tends to be high (but investors obtain much higher rewards).

Crowd Funding platforms turn the lending funnel on end by giving you, the entrepreneur, a single platform to build, showcase and share your pitch to thousands of potential investors in one go. There are, therefore, significant benefits in terms of reach, marketing and efficiency. The downside tends to be you may end up with 100 investors all investing £1000 in your business which may be more awkward and time consuming to deal with in the future. By definition, as the risks tend to be higher you will pay significantly higher costs of borrowing than the usual bank sources. 

However, if you are unable to raise funds from traditional methods but still have faith in your business plan there is a very real opportunity to raise the funds you need and often very quickly indeed. Hopefully this article provides a little more insight into funding opportunities but as always, please ensure you take advice at any early stage from a BFA affiliated accountant to assist you.

Adrian Price is Partner at Menzies LLP – one of the UK’s largest regional firms of accountants and advisers to privately owned businesses.