SMEs urged to look at equity finance

Speaking on Radio 4’s Today programme on Wednesday, Xavier Rolet, CEO of the London Stock Exchange welcomed what he called “the return of the cult of equity.”

He told the programme: “The IPO market has been extremely active going back over the last 18 months. That’s good news for the real economy.

“In the all important small and mid–sized enterprise segment we’ve seen business picking up. We’re rediscovering the financial power of equity versus the old reliance on debt…which is why our economy sometimes gets in trouble.”

Unlike debt investments where borrowers have to start paying interest immediately equity investing gives companies more time before they have to provide their investors with a return.

Equity investors themselves often have more to offer than just money. They may well be able to contribute knowledge and contacts as well as acting as mentors for the company’s founders and managers.

Xavier Rolet’s comments follow on from the launch in February by the London Stock Exchange of the High Growth Segment, a niche market that allows entrepreneurs to list shares in their companies and raise money while keeping as much as 90 per cent of those shares.

The High Growth Segment is principally aimed at mid-sized companies worth £300m to £600m who can demonstrate healthy growth but there are other opportunities available to smaller and mid-sized companies. As well as the stock market, venture capital and business angels provide other means of obtaining equity funding.

Equity investments aren’t cheap, though. This is principally because the costs associated with them are the same whether a company is valued at a few million or a few hundred million.

According to figures published by the Department for Business, Innovation & Skills (BIS) last year, “typical due diligence costs are generally between £20,000-£50,000. They are therefore higher as a proportion of the investment deal size for smaller investments, and for a small investment in a technically complex company, the costs can easily account for ten per cent or more of the investment.”

However, the government is also now offering advice and assistance to SMEs looking for equity funding, through services such as its Business Link Helpline (0845 600 9 006).

BIS and the ICAEW, the accountancy body, have jointly produced a free guide to SME finance which sets out the main financing options and key issues to consider when choosing between options.

There are also specific government funding opportunities based on the principles of equity investing. These include the Seed Enterprise Investment Scheme (SEIS), which was set up in April 2012 and offers a range of tax reliefs to encourage individual investors to purchase new shares in qualifying companies.

Shares must be held for at least three years and income tax relief is available at 50 per cent of the cost of the shares, up to a maximum annual investment of £100,000.

Another example is the Enterprise Investment Scheme (EIS), which is designed to help small higher risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. There are also other government schemes available.

According to the National Audit Office there will be a potential £22bn funding gap by the year 2017 between the amount of finance available to SMEs and the amount they actually need. Carried out with expert advice and due diligence equity investing could help bridge that gap.

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