How Two Funding Tactics Can Generate Great Rewards

In business, raising finance for a project is important. There are a number of ways to do so, including the Enterprise Investment Scheme and crowdfunding.

Don’t underestimate the value of these initiatives. As investment specialist Current Capital explains, they can offer numerous benefits for businesses.

Crowdfunding: the benefits

Previously, the main way investors learned of opportunities was through word of mouth or the direction of accountants and financial advisors.

This meant that self-certification was needed before potential investors could qualify and receive a presentation, brochure and application form for the investment. Those still interested in the investment would then be expected to sign an Investment Memorandum, and then perform their own due diligence and negotiate terms of their investment. Even then the process wasn’t complete, as significant ‘know your client’ procedures would need completing before funds were transferred to a lawyer’s account.

This process wasn’t quick, with investors responsible for sorting their own due diligence and covering any costs that may arise. Fortunately, crowdfunding has made the entire process much more efficient.

Crowdfunding helps businesses raise money for a particular project, as well as awareness and support. This is particularly beneficial for smaller businesses who have been turned down by High Street banks, as they can appeal directly to small investors (including members of the public) by trying to raise money for an idea in return for a share in the business.

The benefits of crowdfunding include:

  1. You receive advocates who will support both a business and their idea, becoming part of the journey and making for appealing ambassadors when the project develops in the future.
  2. Additional funding can be unlocked, such as grants, if a charity or community group or investors, loans or a pre-cursor to an equity crowdfunding campaign if a business.
  3. While creating and launching a project via a crowdfunding platform, those with the idea will need to think about how best to market the idea — developing their marketing skills in the process.
  4. Validation is received by the fact that small investors and members of the public are on board with an idea and are already paying or contributing in order to bring it to market.

The Enterprise Investment Scheme

The government’s Enterprise Investment Scheme (EIS) helps businesses grow existing investments and establish new investments for their project.

The scheme works by allowing smaller companies with a higher risk raise funds through investor tax relief. The benefits are as follows:

  • A deferral of EIS Capital Gains Tax for the life of the investment on the amount subscribed.
  • 30 per cent EIS income tax relief on the amount subscribed, which can be up to a maximum investment of £1 million in the 2017/18 tax year and/or £1 million which is carried back to the 2016/17 tax year for a minimum of three years.
  • 100 per cent inheritance tax relief after two years, so long as the investment is held at the time of death.

To use a working example, a £100,000 investment by a UK taxpayer in a qualifying company would result in a £30,000 tax rebate. This depends on their income tax liability being over £30,000 in the previous tax year.

More information on the EIS can be found GOV.UK site or the Current Capital website.