Industry experts share their views on what the world of smaller company finance will look like after the March Brexit deadline
As we enter one of the most turbulent political and societal periods in recent memory, there has been a lot of attention on large businesses and how they will operate in or outside of the UK after March 2019.
However, for the wider economy of small, scaling, and medium-sized businesses, securing funding to galvanise their market position and achieve the next level of growth are often forgotten about in times like these. Four industry experts have given their advice on how to achieve growth finance for start-ups and scale-ups and how investors can negotiate the pre-Brexit landscape.
Mark Brownridge, Director General of the Enterprise Investment Scheme Association (EISA)
Securing funding as a start-up is often one of the biggest challenges that new businesses face. Not only is it often difficult to secure the funding itself, it is even more so when trying to get the right kind of funding for the specific needs of the business. This is key to the government’s plans for strengthening the UK economy as SMEs make up 98% of private sector businesses and contribute £1.9 trillion to the UK economy. Allowing this sector to grow and bolster its numbers is absolutely key to the future.
One of the routes that allows this to happen in the UK is through SEIS, which offers investors tax reliefs in order to offset the higher risks involved in investing capital into start-ups. SEIS represents an alternative to start-ups from traditional finance routes such as banks that may not be willing to lend. This is especially useful for small businesses that base their proposition on intellectual property (IP) as opposed to physical assets or products. These IP-rich companies often have trouble finding support without physical collateral to offer as security.
Individuals looking to invest through SEIS can then make decisions based upon individual cases and potential rather than being held back by regulation or corporate policy. Of course, the risk still exists but with tax and loss reliefs, it is much more likely that the risk will be seen to be worth it in the eyes of an investor. Getting ideas off the ground is arguably the most important part of encouraging new businesses and creating new jobs as they grow and expand.
Luke Davis, Chief Executive and Founder of IW Capital
It can be daunting for start-up businesses to scale into fully-fledged entities, especially in times of political and economic uncertainty. This is where alternative finance options come in that we, at IW Capital, help to provide. We can provide both debt and equity-based funding through EIS which, much like SEIS, offers investors a government-backed tax efficient way to support small businesses, balancing out some of the increased risk to capital that comes with the territory of investing in new companies. EIS has a much higher limit for annual investment making it more suited to SMEs that are past the initial stages of set-up compared to SEIS with an annual limit of £1 million.
This is particularly important for knowledge-intensive SMEs that struggle to secure funding without assets to use as collateral for loans. With an industrial focus on research and development this will be key moving forward with the government’s plans to grow the tech industry. This is reflected in the increased EIS limit for knowledge-intensive companies of £2 million per year, this change has been introduced to provide further encouragement to investors to support IP-rich businesses.
Supporting SMEs is hugely important for the UK economy as they represent the employment of around 16 million people in the UK – depending on who you ask – and this number is currently growing at a rate that is three times faster than for big corporations. Fueling this growth will be key moving into a post-EU economic landscape that will rely even more heavily on domestic business and job creation.
Jonathan Schneider, Executive Chairman of Capital Step
Family-run and regional businesses form the lifeblood of the UK’s entrepreneurial landscape. Equally, it is apparent that the funding options available to established family-run enterprise seem to be eclipsed – in local communities – by corporate entities that have greater exposure to the most appropriate funding options. The role of the family enterprise, community SMEs, and bricks and mortar productivity across the length and breadth of Britain must be considered a firm priority for the UK government – deal or no deal.
Transitioning the immediate aftermath of Brexit will be an acutely sensitive process; ensuring the foundations for a business community that can thrive and scale in the long term will lead the charge for a successful post-Brexit future – the UK economy is only as strong as the businesses and communities that uphold it.
As both investors and entrepreneurs, we have witnessed countless examples of business owners having to give up control of their companies in exchange for funding. In many instances, even successful founders end up with a disproportionately small reward for their hard work upon exit as a result of having sacrificed too much ownership and control along the way. The Capital Step model is specifically designed to address this issue, by providing flexible capital solutions without existing shareholders having to give up ownership or independence in exchange.
Jenny Tooth, Chief Executive of the UK Business Angel Association (UKBAA)
In our current political landscape, Brexit will undoubtedly be at the forefront of investor sentiment for 2019; where and how much investors invest will be very much dependent on the broader economic and political climate. It is expected that, as investing in the EU markets will become more challenging for investors, we should see an increase in investment for businesses which are globally focused. I therefore anticipate a continual growth in investment towards some of the most significant emerging technologies and fintech as these sectors will continually have societal and global impact.
We as trade bodies, policymakers and commentators bear a significant responsibility to assist UK SMEs in what will be one of the most critical periods in their business life, ensuring contingency plans, scalability options, growth strategies, and immediate resilience responses to ensure their successful navigation of the seismic impact of Brexit.
In particular, the UKBAA has focused a significant amount of attention on increasing regional investment, with the implementation of many angel hubs throughout the UK, especially in Northern regions. However, there is still a long way to go to fully utilise the untapped potential found within these areas. This can only be done when it is popularly recognised that there are significant investment opportunities outside of London beyond Brexit.
With the Brexit deal still to be decided by all parties, rifts within the government, and businesses battening down the hatches ahead of March 2019, SMEs and SME investors may be uncertain of what the future holds for the UK’s entrepreneurial economy. However, much of the alternative finance arena is optimistic about opportunities for both investors and scale-up enterprises. Whether you are a start-up, scale-up, established business or investor, there is still a vast array of opportunities for you throughout and after Brexit.