Entrepreneurs are starting businesses on a shoestring budget rather than turn to tax incentivised finance such as the Seed Enterprise Investment Scheme (SEIS).
Although SEIS allows shareholders to take a stake in a business for up to £100,000 and offers generous tax breaks in return, cash-strapped entrepreneurs are toiling under a lack of resources.
One in four start ups spend less than £1,000 in the first year, according to a study by business support group Shell livewire.
The network is an online community for entrepreneurs aged 16 to 30 years old with almost 250,000 registered members.
Even though many entrepreneurs spend more than £1,000, it’s not that much more, the survey reveals.
Another quarter spend between £1,000 and £5,000 in their first year of trading, while around 44% plough between £5,000 and £100,000 into their start ups. Only 6% have the resources to pump more than £100,000 into their fledgling business.
The research also found 75% of entrepreneurs raid their savings for their start up cash, 30% get financial help from their families, 10% go to a bank and under 5% resort top crowdfunding.
Half of entrepreneurs are sole traders and 20% set up joint ventures with friends.
According to the survey, none look to the government-backed SEIS for funding, even though a start-up company can raise up to £100,000 from investors.
The investors face little risk with their cash as they receive attractive tax benefits for handing over their cash and the new company takes on no debt as the capital is raised from distributing shares.
Tax benefits for investors
The downside is companies have to seek approval to raise the investment from HM Revenue & Customs (HMRC), but figures show 94% of applicants gain assent to enter the scheme.
Around 7,500 companies are in SEIS, which was championed by Chancellor George Osborne in his Budget 2012.
In return for shares, investors also gain 50% income tax relief on their cash stake; regardless of the rate they pay tax.
Capital gains tax advantages are available both on selling assets to raise cash for the investment and the growth in value of the equity stake in the business.
Should the worst happen and the business fails, the investor also wins loss relief to offset against other income.
“It seems a shame so many entrepreneurs are facing financial problems as well as trying to start a business when SEIS investment is available,” said an HMRC spokesman.