Entrepreneurs have trouble raising finance to grow their businesses because they do not know where to look for investment once a bank turns them away, says a new report.
To try to level the playing field, the government has introduced a raft of new measures to help them with alternative finance sources – but 50% of entrepreneurs still say they find raising money difficult.
Tax breaks for investors taking an equity stake in a start-up company under the Seed Enterprise Investment Scheme (SEIS) are proving successful.
Investors win 50% income tax relief on up to a £100,000 investment plus 50% slashed off their capital gains tax bills if they sell property or investments to raise the cash for SEIS.
Along the way, their equity stake grows tax-free, and if the investment fails, they pick up loss relief against other income.
Seed Enterprise Investment Scheme (SEIS)
Companies that need more than £100,000 can graduate to the Enterprise Investment Scheme (EIS), which offers 30% income tax relief, tax-free growth and loss relief.
Now, the government feels SEIS and EIS fill the holes in equity funding and wants to look at doing more for debt funding.
In a new measure introduced as part of the Small Business Enterprise and Employment Bill, economic secretary to the treasury Andrea Leadsom wants banks to tell entrepreneurs about other possible sources of funds if they turn down a borrowing application.
A new law will make sure banks reveal lending by postcode area, so new lenders can identify where to target their cash.
Banks will also have to tell entrepreneurs about alternative funders, such as peer-to-peer lenders and crowdfunding platforms.
Rough deal from banks
Leadsom explained as small businesses clock up more than half of private sector GDP and employ more than half of all private sector workers, they still get a rough deal from banks who regard them as too risky to lend to.
“Helping small businesses access finance so they can grow and continue to contribute to the economy is a crucial part of the government’s long-term economic plan,” said Leadsom.
“More competition among lenders and developing different forms of funding that suit varying business models are all part of this plan.
“This new law is important in making sure businesses who want to borrow can be matched with lenders who want to lend.”
Leadsom also pointed out that refusal to lend by a bank is not the end of the road for entrepreneurs as plenty of other lenders want to help.
