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Why the EIS and crowdfunding are great for raising finance

If you are looking for ways to raise finance when you have a new project in mind at your business, both the Enterprise Investment Scheme and crowdfunding can prove very beneficial. Specialists in guiding people through their investment journey, Current Capital, explain why:

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Understanding the Enterprise Investment Scheme

Set up by the government, the Enterprise Investment Scheme — or the EIS for short — has been created so that companies are encouraged to grow and attract investment from qualifying investors.

The initiative proves appealing as it provides a variety of tax reliefs to investors if they choose to buy new shares from any of the companies involved. The EIS also assists smaller, higher-risk trading companies when it comes to raising finance. Benefits of the scheme include:

  • 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.

Bearing these figures in mind, if a UK taxpayer invests £100,000 into a qualifying company then the EIS will ensure they will receive a £30,000 tax rebate from the HMRC, so long as their income tax liability for the previous tax year had exceeded £30,000.

To read more about the EIS, visit the GOV.UK site or head here. There, you will find information about the various tax reliefs available, how tax relief can be claimed, times when tax relief can be reduced or withdrawn and how a company can qualify for the EIS.

Understanding crowdfunding

It’s a scenario you’re very likely to have encountered if you’ve been in the business world for a few years already. In the past, accountants, financial advisors or simply through word of mouth would have been the ways that investors heard of opportunities within business.

From there, necessary self certification would need to be completed to become a qualifying investor, before they were provided with a presentation, brochure and application form about the opportunity. 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.

As you can imagine, this is a process which takes a considerable amount of time to work through. It also requires investors to arrange for their own due diligence and account for any associated costs. Fortunately, crowdfunding has made the entire process much more efficient.

An initiative which is especially appealing to small business which have been turned away by High Street banks in the past, crowdfunding is a platform for those with a project in mind to raise awareness, money and support towards the idea. In effect, it enables companies to appeal directly to small investors (including members of the public).

Look into crowdfunding at your business and you will receive these four key benefits:

  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.

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