Small firms should look into equity funding rather than cash from the banks, according to the CEO of the London Stock Exchange.
Xavier Rolet was talking on BBC Radio 4’s Today programme and explained that while banks were unwilling or unable to help businesses, equity finance offers a viable alternative.
“The nation is reinventing equity funding instead of looking to debt finance,” he said.
“That’s good news for business and the economy and removes one of the problems that sometimes makes the British economy stall.
“Too much reliance on the banks is not good for businesses.”
Equity finance has several key benefits for a business.
Instead of paying expensive capital and interest payments back to a lender, equity funding involves no debt repayments.
Investors make their profits from dividends paid on company profits and trading their shares.
Equity investors can also contribute more to a business than cash as many have wide-ranging business experience that they can pass on as mentors, he added.
One of the drawbacks of equity investment is the cost of due diligence, which can amount to between £20,000 and £50,000.
However, the government is offering generous tax breaks to encourage equity investors into the market.
Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) for start-ups offers a 50% reduction on income tax paid in the year of an investment which can be worth up to £50,000 on a maximum SEIS investment of £100,000.
Capital gains tax exemptions and reliefs also slash taxes for investors disposing of assets to raise cash for an investment, while any growth in the value of the investment is CGT-free providing shares are held for at least three years.
Should a SEIS start-up fail, a back-stop is loss relief against other income.
The Department for Business, Innovation & Skills does point out that even for a small SEIS investment, the due diligence costs can make up 10% on top of £100,000 investment.
The Enterprise Investment Scheme (EIS) offers tax reliefs to investors staking larger sums for equity in companies.
Although both schemes are raising cash for companies, the National Audit Office estimates a potential £22 billion funding gap by 2017 between the cash small businesses raise and the amount they need.
Small firms looking for equity finance can find more information and investment advice from the Business Link Helpline (0845 600 9 006).