Information and support
Information and support
Making your business more attractive to investors
The benefits of EIS and SEIS
Have you ever thought about EIS/SEIS? It could be a great way to appeal to investors, helping them reduce their tax liability, and the risk associated with investing in your business journey.
This month sees the addition of a new partner association to the Business Finance Guide – EISA. The EIS Association (EISA) is the official trade body for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) industry. EISA is a highly effective not-for-profit organisation that supports the provision of capital to UK small and medium-sized enterprises (SMEs) through these two schemes.
What are EIS and SEIS?
If you own a business or plan to start one then there is likely to come a time when you are looking for external finance to fund expansion, or support the next stage in your business journey, whatever that may be. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have been designed by the UK government to make it easier for small and medium-sized enterprises (SMEs) to raise finance to grow. Neither scheme is new, but still, many business owners are unaware of the schemes and their business benefits.
The Business Finance Guide sees many different businesses, their challenges and successes, and because of the diversity of growing businesses in the UK today, we are particularly keen to include EISA – and an explanation of EIS and SEIS – within the guide.
The spirit of EIS is to foster creativity and innovation, while also driving job creation across the UK. Investing in Enterprise Investment Schemes is encouraged by the government to raise funds for a greater number of small businesses, and this is reflected in high rates of tax relief on offer to potential investors.
For business owners looking to secure investment in the business who want to make this as attractive as possible to investors – especially when those include business associate, friends and family – EIS and SEIS provide a mechanism for the business owner to mitigate some of the risk for investors, and also to make the investment more attractive.
This equity financing option has been successfully used by many early stage businesses. EIS and SEIS have provided funding worth £15bn to nearly 30,000 UK businesses in a diverse range of sectors and trades.
Both early stage companies and more mature, established businesses have all benefited.
Flubit is a UK-based online marketplace through which users receive an average 10% discount compared to Amazon.co.uk. In 5 years Flubit has grown from 5 people to more than 50, and has just launched its B2B offering, SKUcloud.co.uk. EIS funding helped Flubit to become the second largest product marketplace in the UK after Amazon.
Three original high net worth individuals invested in Flubit using EIS, and from this, the number of external investors has grown to 50 individuals: 29 of whom have invested via EIS with investment sums ranging from £5k to £500k. In total, a third of Flubit’s £13m of external funding has come from EIS investors. Many of Flubit’s investors found out about the business from the original three investors, demonstrating how EIS plays an important role in helping to create investor networks who often collaborate to help businesses grow.
“EIS funding has been great for us. By the time we received EIS investment, we had already been running for a couple of years, but EIS money helped us to build on that by scaling up quickly and effectively. EIS is an excellent option for investors because of the tax reliefs they receive, but it’s also been an excellent deal for us. In addition, the network I have access to through my EIS investors is truly amazing in terms of the expertise and breadth and depth of experience and connections.”
Bertie Stephens, founder & CEO, flubit.com
If you think your business could be eligible, the next step is to consider whether it is suitable for EIS or SEIS funding to support your business journey. Just because a business qualifies for funding, it does not mean it is suited for it.
To be potentially suitable for EIS or SEIS funding your business must be ‘investable’.
In other words, it must have the growth potential to convince external investors that they will get their money back and a good return besides. Investment via EIS or SEIS is considered a long-term investment – the minimum investment period is 2-3 years, depending on the exact nature of the business, but often, the investment will continue for much longer. For investors to back your business into the long term, they will need to be convinced that:
1. You have a good idea, product or service and a strategy in place for making it succeed
2. You have clearly thought about what success could look like for you and your investors
You should think about your planned growth trajectory, factoring in revenues, profits, expansion targets, the amount of money you need to move, and what you need to spend it on. These are among the most important considerations when determining whether EIS or SEIS could be right for your business.
If you are a high street coffee shop and want money to extend your premises, a small business loan from a bank may be your best option. If you are a local or regional chain of boutique coffee shops with a novel proposition that you believe has national scale-up potential – and you can clearly demonstrate why in a detailed business plan – then EIS or SEIS could be a great option.
The difference between EIS and SEIS
EIS is a scheme designed for funding more established businesses, whilst SEIS is targeted more at start-ups and early stage businesses. It can provide a useful alternative to VC funding, especially since typical investors are able to take an active role, contribute expertise or connections where useful, and may not seek the more complicated remuneration arrangements sometimes associated with venture capital.
The table below explains the similarities and differences between the two schemes:
The above information was accurate at the time of publishing (06.11.2017). Updates to EIS were announced in the Autumn Budget 2017 – find out more information on the update to EIS here.
To explore all the finance options available to your business, why not try our finance journey planning tool?