Investors must now think small

SMALL companies, entrepreneurs and start-up businesses can find it particularly difficult to attract equity finance.

SMALL companies, entrepreneurs and start-up businesses can find it particularly difficult to attract equity finance. Often investors prefer to invest larger sums in big companies versus the relatively small levels of investments required by SMEs and start-ups.

Accessing finance is the critical element in order to get any business venture up and running, but that is precisely what is proving so difficult to achieve at the moment. We need to encourage investors to support these enterprises and that means working with the companies to produce realistic, credible business plans.

It also means encouraging investors and a sensible way to do that in the current economic climate, is to simplify the tax system and use it to encourage investment.

Enterprise is at the centre of the current government’s longer term plans for the UK, which is welcome news for entrepreneurs. Despite the hard times, they still have funds to invest but, understandably, they are critically appraising those investment opportunities more than ever.

These investors understand the market well, so start-ups who haven’t researched this and taken advice, will undoubtedly find themselves at a disadvantage where competition for investment is fierce.

New companies that fall into the so-called £2m to £10m “funding gap” are increasingly reliant on the tax reliefs to attract investment. Of course these generous tax reliefs come with a list of conditions that must be adhered to. That means good advice at an early stage is essential.

The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) were introduced in the 1990s and have supported over £11.5bn of equity investment into UK businesses. Around 10,000 individuals invested through EIS in 2008-09 and around 6,300 through VCTs.

A consultation has recently closed on plans to raise the rate of EIS income tax relief to 30 per cent from April 2011 and to increase the annual EIS investment limit for individuals to £1m from April 2012. The proposals also include increasing the annual investment limit for qualifying companies to £10m for EIS and VCTs from April 2012 . Today’s younger, entrepreneurial businesses are tomorrow’s PLCs and we simply must support them in these difficult economic times.

:: Stephen Hall is tax partner at Deloitte in Newcastle


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