Should you use alternative financial arrangements to boost your business funding?

 In Small Businesses & Startups

Funding for small business owners doesn’t end with the banks. There’s now a whole variety of methods that you can use to boost your business investment through alternative financial arrangements.

Depending on your business aims and credentials, there are enterprise investment schemes (EIS) that can give you quick access to business funding capital, or invoice financing, that can add fluidity to your finances. Here’s some of the options on offer:

Enterprise investment schemes

Small businesses looking to attract capital investment with tax relief status and the likelihood of a healthy return have raised over £12bn through EIS since the initiative was launched in 2003.

Why are EIS and SEIS attractive for investors?

Tax relief is the primary motivation for investors, who can receive 30% relief on investment through EIS and 50% relief on investment through SEIS (reflecting the additional risk). Therefore, an investment of £10,000 would cost only £7,000 and £5,000 for EIS and SEIS respectively.

In addition, investors aren’t required to pay capital gains after the three-year term if the investment has grown in value, and losses can be offset against tax bills. Capital growth is usually more pronounced in smaller businesses, allowing greater margins on returns, while investing without a bank prevents the investors from risking assets as security.

Who can apply?

Entry criteria differ depending on which scheme applies to a company of your size.

EIS

To qualify for EIS, the company must:

  • Have fewer than 250 full-time employees
  • Be permanently based in the UK
  • Possess gross assets of less than £15m
  • Raise a maximum of £5m per annum (more than this and investors will lose tax relief status)
  • Use any investment within two years of share issuance
  • Prove that investment is for a ‘qualifying trade’ or research towards it (a ‘qualifying trade’ includes most occupations, except a stated list that includes commodities trading, financial activities and farming)

SEIS

To qualify for SEIS, the company must:

  • Have fewer than 25 employees
  • Own less than £200,000 in gross assets
  • Have not used the scheme before
  • Raise a maximum of £150,000
  • Use any investment within three years of share issuance

In both cases, the business must be less than seven years old and adhere to the terms of the agreement for at least three years after investment is secured. Also, no other business can have a controlling stake and subsidiaries must be over 50% owned (90% for EIS).

How to apply

To apply for this business funding, a company should seek ‘advance assurance’ from the Small Companies Enterprise Centre, who will consider any applications on behalf of HMRC.

Invoice financing

Invoice financing is a means of releasing the amount owed by a commercial customer on an invoice, with the invoice being sent to a third-party (for a small fee) as an asset against which money is lent. There are two main types of invoice financing:

Invoice factoring

Invoice factoring gives full control for recouping the outstanding amount to a third party. The debt owed to the company would be purchased by an invoice financier, who gives a set percentage back to the company as an advance (often around 85%).

The customer is then notified of the change and the remaining invoice value (approx. 15%) is held from the company until the customer settles the bill. Once paid, the remaining balance will be returned to the company, minus transaction costs and commission.

Invoice discounting

Invoice discounting involves a third-party financier lending the company a percentage of the outstanding invoice amount. The financier is then paid back when the invoice is settled, keeping the company in control of customer relations.

To find out which business funding options are right for your company, or for more expert advice from an accountant who specialises in small business finances, contact our friendly team today.

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