What is EIS? – alternative funding options for small businesses

There are a range of options available to small businesses when it comes to funding. One one hand, you have the traditional routes like bank loans, investors and the use of personal savings, while on the other hand, technology has created the likes of crowdfunding.

However, one of the best alternative routes to funding now available to small businesses is the Enterprise Investment Scheme, or EIS.

As a small business accountants in London, we specialise in working with clients to grow their business, and part of that includes helping them to secure the funding they need to prosper.

Get in touch with our team to discuss your business plan, and what you need to do to attract investment for your small business.

What is EIS?

Launched in 1994, the Government hoped EIS would encourage high-earning individuals to invest money in small companies which, otherwise, may have seemed too risky.

The scheme creates a huge opportunity for entrepreneurs and small business owners as they can leverage the tax breaks associated with the scheme to attract the investment they want or need.

How does EIS work?

The scheme offers investors a number of perks and incentives in return for investing in startups and small businesses.

Investors are offered income tax relief in proportion with the cost of the shares they purchase through EIS, and should they make a loss upon the sale of their scheme shares, they have the opportunity to claim loss relief, which not only cuts their tax bill but also illustrates the reduced risk involved in EIS.

EIS is geared towards early-stage, new investment in companies with low levels of staff, assets and turnover, thus making the scheme integral to supporting the creation and growth of business in the UK.

The 2011 Budget marked a great boost for small businesses seeking funding as income tax relief on the EIS increased from 20% to 30%, thus giving investors an even better incentive to invest, while also boosting a small business’ likelihood of securing funding.

Does the EIS scheme attract much investment?

Since the enhanced incentives brought on by the 2011 Budget, the innovation foundation, NESTA, have reported that 80% of the business angels they surveyed had invested through the EIS at least once, thus clearly showing how attractive the scheme really is.

Additionally, EIS has provided more money for early-stage companies than the venture capital industry on a regular basis; at one stage providing twice as much according to NESTA.

How much can I get from EIS?

As part of EIS, a business can receive up to £500,000 from a single investor in a given tax year, while overall they can accept a maximum annual investment of £5m through the scheme and a total of £12m in the company’s lifetime.

In 2014/15, just over £1.3bn in income tax relief was claimed by a total of 29,380 investors. This gives an overall average investment amount of just under £44,500.

Am I eligible for EIS?

The vast majority of trades qualify for EIS investment, so it’s highly probable that your firm will be eligible, too.

Only a few trades are excluded – these include shipbuilding, coal and steel, farming, property development and accountancy.

Eligible companies must be established in the UK and does not control another company other than qualifying subsidiaries. Further to that, an eligible company must not be controlled by another company or have more than 50% of its shares owned by another company.

An eligible company and its qualifying subsidiaries must not have gross assets worth more than £15m before any shares are issued to EIS investors, and the value of their gross assets must not exceed more than £16m immediately after shares are issued.

Finally, the business must have fewer than 250 full-time employees at the time the shares are issued.

Although the majority of companies qualify for the scheme, it’s important to bear in mind that there are a number of restrictions.

For example, you cannot receive EIS investment if you’re quoted on the London stock exchange, or controlled by a bigger firm.

Furthermore, the scheme is designed to help companies enhance their existing trade; if you want to use the EIS investment to change the nature of your business, you probably won’t get the funding.