Growing Your Business with Third Party Funding

Posted by on Dec 2, 2014 in News Alerts, Newsletters | No Comments

Raising business finance remains extremely tough for small businesses through the traditional business loan or overdraft from the bank.

As a result, many companies are now utilizing other avenues of third party funding.  Likewise, many people with money to invest are benefiting from the potential yield.

A common method of raising capital for a business venture is through family and friends and the government has introduced a number of schemes to mitigate the risk to the potential investor.  The Seed Enterprise Investment Scheme (SEIS) is the most appropriate for a small business looking to raise up £150,000.00.

To qualify, a business has to meet the following criteria:

–          have a UK permanent establishment;

–          have fewer than twenty-five full time (or equivalent) employees;

–          have gross assets of not more than £200,000 at the time of the SEIS investment;

–          have not previously received investments under the Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCT) schemes.

In addition, the SEIS investment must be spent for the purposes designated within three years of the investment.

The investment is in return for shares in the business which must be new Ordinary shares fully paid up at the time of issue with no preferential rights, other than some limited to dividends, and no rights of redemption.

For the investor, the SEIS offers some attractive tax reliefs with up to a 50% Income Tax relief in the year of investment and, after three years, a total exception from Capital Gains Tax.

However, there is an annual investment limit of £100,000 and there are some qualifying criteria for investors. Primarily,

–          you and your ‘associates’ must not have a ‘substantial interest’ in the business.  This is deemed to be not more than 30% of the issued share capital.  Associates include business partners, trustees and relatives – spouses, partners, parents, grandparents, children, grandchildren, but not brothers and sisters.

–          neither you nor any of your associates may be employed by the company (but you may be a director of the company).

These criteria must be satisfied for three years from the issue date of the SEIS qualifying shares otherwise the tax reliefs would be withdrawn completely.

Another method of raising finance for an established business that is growing in popularity is peer-to-peer lending. 

One of the leading facilitators for this in the UK is Funding Circle who have created a marketplace that connects businesses looking to borrow with people who want to lend and is supported by the government through the British Business Bank.

For the business, loans of up to £200,000.00 can be applied for on an unsecured basis or more if backed by security.  The application process is relatively straightforward and, once the tender has been put out to market, there is no obligation to accept the proposed rate.

In order to retain lender confidence, there is an extensive credit assessment of every application and only established and creditworthy businesses are able to borrow through Funding Circle.

However, this process is usually more expedite and less expensive than borrowing from the traditional banks.

For the investor, the returns can be far in excess of those available from deposit accounts or bonds.  However, it is important to remember that these are, in effect, unsecured loans and there is an inherent risk of bad debts.

As a result, if you decide to invest through either a peer-to-peer platform such as Funding Circle or a crowdfunding platform like Seedrs, the key recommendation is to ensure that you diversify your portfolio to mitigate this risk.

At CooperFaure, we have extensive knowledge of raising business finance both through government-backed schemes and from the third parties. 

If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.