Entrepreneurs seeking funding for their business ideas are turning towards the Seed Enterprise Investment Scheme (SEIS) to pitch for finance as other lending sources dry up.
Around 2,000 companies have SEIS pre-approval, according to HM Revenue and Customs, and they are all throwing their hats into the same ring to raise money from a limited pool of investors.
In this free-for-all, investors can easily lose sight of their financial objectives, so here are some harsh facts of SEIS investment life to consider before parting with any cash.
Why do businesses like SEIS?
The slowing global economy, low interest rates and general lack of exciting investment propositions among large cap companies make turning a decent profit after tax and inflation have taken a bite a problem for investors.
Start-ups and small businesses are not a universal panacea but do offer an alternative.
These firms are nimble and can quickly change course to zero in on niche markets to make quick returns.
The problem for these businesses is bank finance has disappeared and even if they could raise credit, they have little or no assets to secure the debt against.
SEIS offers equity funding at a low level that removes the need for collateral.
Why do investors like SEIS?
Good business deals have to have something for both sides – and SEIS provides that. The entrepreneurs get their cash, but the investors have a pile of tax breaks that ratchet down the risk.
Five key tips for SEIS investors
- Scrutinise the business idea not the tax breaks. If the business idea does not hold water, then you should not invest. Treat the tax benefits as a bonus, not a reason to invest.
- Entrepreneurs can have ideas that are not rooted in the real world. They come up with products or concepts based on a flight of fancy rather than a way to make money. Look for solid business plans and experienced managers who want to make money and have a clear idea of how they are going to achieve their goal
- Check out those businesses plans and make sure the figures and assumptions are plausible.
- Make sure you have a big say in how your money is spent
- Prepare your exit strategy at the start and do not hope for the best along the way
Diversify your cash
Like all investments, diversify. Do not put all your cash into one company. By the nature of the investment, many SEIS companies will provide poor returns or fall by the wayside within the three year start-up period.