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Do you run a small, early-stage company with assets of less than £15m that is in need of capital investment? If so, now might be the time to reach out to the venture capital trust industry. It has just raised a near-record sum, most of which will have to be deployed into qualifying companies within the next three years.
VCTs are collective funds that offer investors a generous range of tax breaks in return for the elevated risk of backing less mature businesses. They must invest 70 per cent of funds raised in qualifying companies within three years of picking up the cash – and there are strict rules on which businesses qualify.
To be eligible for VCT investment, a company must be unquoted, though listings on the London Stock Exchange’s junior Alternative Investment Market are not disqualified. It must generally have assets of less than £15m before it raises money and fewer than 250 employees. And usually it must be no more than seven years old.
If your business fits the bill and is looking for equity investment of between, typically, £100,000 and £2m, the VCT sector could be a good option.
The 2018-19 tax year, which ended earlier this month, saw VCTs pick up new funding of £731m, the second highest figure on record since VCTs were launched in the early 1990s. The sector just managed to outdo its 2017-18 total of £728m of funds raised.
The upshot of these two bumper years is that VCT managers now have the best part of £1.5bn at their disposal. At least 70 per cent of this funding must be deployed within three years - a good chunk of it even sooner - meaning that managers are now scouring the market for suitable businesses to back.
That’s good news for entrepreneurs looking for financial backing. While private capital has been easier to find in recent years, bank lending to small and medium-sized enterprises has remained stubbornly flat, with many businesses forced to be more imaginative about where they raise money. VCT investment takes the form of equity capital rather than debt finance but does not necessarily require founders to give up a majority stake in their businesses.
Why the leap in VCT fund-raising? Well, one significant influence has been a reduction in the tax relief available on private pension contributions, particularly for high earners. With many savers now restricted on the pension contributions they may make, both annually and over their lifetimes, they have turned to alternative tax-efficient investment vehicles. VCTs, though higher risk, offer an attractive range of incentives that is proving popular.
Nor is the VCT industry the only possibility for smaller businesses interested in raising this type of investment. Though data for 2018-19 is not yet available, it’s also likely that the enterprise investment scheme (EIS) enjoyed a bumper year. EISs offer similar tax breaks to VCTs and are required to invest in similar types of company – though typically on an individual basis rather than through a fund structure – so could another interesting funding opportunity for entrepreneurs to explore.
April 26, 2019 at 04:48AM
Forbes – Entrepreneurs