With an increasingly competitive marketplace, securing finances remains one of the biggest challenges for many startups and small businesses looking to launch or expand operations. Traditional lending routes through banks have become more difficult in recent years. As a result, companies are exploring multiple funding options to access the capital they need to grow.
One route which has been gaining popularity is the Seed Enterprise Investment Scheme (SEIS) launched by the UK government back in 2012. By providing tax incentives for investors and making it easier for qualifying companies to obtain equity financing, SEIS aims to promote investment into early stage ventures. But is this scheme the right funding solution for your fledgling or developing business?
In this article, we’ll take a closer look at SEIS, weigh up the potential benefits and risks, and help determine if it’s a viable funding option.
What Is SEIS?
The Seed Enterprise Investment Scheme (SEIS) programme enables investors to claim back up to 50% of their investment from income tax liabilities by investing in eligible startup companies. Additionally, investors don’t need to pay capital gains tax when selling SEIS shares, provided certain conditions are met. There is also potential for loss relief against income tax and the ability to carry back capital losses against income tax or capital gains tax liabilities.
For companies to qualify for SEIS investment, they must meet certain criteria. Businesses must be unquoted, have fewer than 25 employees, and have gross assets under £200,000. The company must be carrying out a new trade and be less than 2 years old when shares are issued.
There are also restrictions on the types of trades and activities that qualify. SEIS funding is designed for early stage UK companies looking to raise from £50,000 to £250,000 in their first pre-seed round and £500,000 to £1.5 million in their seed round, on average. The goal is to help them get off the ground and expand during the critical startup stages.
Benefits Of SEIS
The SEIS offers several valuable benefits that can make it an attractive option for startups and early stage companies looking to raise equity financing. One of the biggest advantages is the income tax relief it provides to investors.
Under SEIS, individuals can reduce their income tax liability by 50% of the cost of their investment, up to a maximum of £100,000 annually. This tax break applies to the tax year the shares are issued, so it represents a very timely relief, especially beneficial for higher rate taxpayers.
There is also a capital gains reinvestment relief, whereby investors can reinvest capital gains and avoid paying capital gains tax on those gains, assuming they meet certain conditions. Additionally, if the SEIS investments fail and the investor ends up making a loss, they can claim loss relief against their income tax liability, offsetting up to 45% of the amount lost.
Deferred capital gains tax is another useful benefit, enabling investors to defer capital gains made on assets in the previous tax year until after subsequent disposal of the SEIS shares. Providing the SEIS shares are held for at least 3 years, the investor will pay no capital gains tax on any profits made when eventually disposing of them.
Risks And Considerations
While the benefits are certainly advantageous, there are some definite risks and important considerations to keep in mind when exploring SEIS as a funding option. Firstly, issuing new shares means giving up equity in your company and diluting control, which needs to be carefully managed.
Qualifying for SEIS investment requires meeting strict eligibility criteria around age of business, number of employees, gross assets and more. Failing to satisfy these would mean missing out on the tax advantages, so companies need to ensure they can comply. There is also no guarantee of follow-on funding beyond the initial SEIS raise; additional fundraising would still be required to finance future growth phases.
It’s important to note the timescales involved as well – it can take 8-12 weeks for investors to receive the all-important SEIS tax relief certificates from HMRC after making their investment. Restrictions on exactly what the SEIS funds can be used for also need to be considered, as there are limits on acquisition of assets and rules governing qualifying business activities. Finally, companies must take care not to breach the eligibility criteria after securing SEIS funds, as this risks retrospective loss of SEIS status back to the point of breach, endangering the tax benefits.
Assessing Financial Needs
Assessing your startup’s financial needs early on is key whether you’re interested in SEIS or not. It is good practice to seek consultation or advice and thoroughly consider what those financial needs are before making any decisions. Estimate your operating expenses like office space, business staffing costs and equipment.
Develop a 12-18 month financial model to project expenses and revenue. This will determine how much funding is needed pre-profitability. Quoting software can also help you plan and win profitable clients so you can and build in a buffer for unexpected costs. Research alternative funding options like crowdfunding and angel investors as well as clear fundraising goals and milestones.
Alternatives To SEIS
While the SEIS can be a great funding option for some early stage companies, there are other alternatives that businesses may want to explore as well. Crowdfunding platforms like Kickstarter and Seedrs allow startups to raise relatively small amounts of equity or debt financing from a large pool of investors online.
This not only provides access to capital but also helps build a community of engaged customers. Grants and loans offered by government bodies and nonprofit organisations are another option, providing financing without diluting control or ownership. Schemes like Start Up Loans offer easy access to early stage funding that can cover costs like equipment purchases, property, and marketing expenditures.
Turning to angel investors is another route, typically bringing both capital investment and invaluable domain expertise to startups they believe have high growth potential. Finally, for companies needing larger scale funding to expand more rapidly, venture capital firms and private equity investors can provide more substantial investment rounds in exchange for equity stakes.
Is SEIS Right For Your Business?
Figuring out if the Seed Enterprise Investment Scheme is the right funding choice for your startup involves asking several key questions. Firstly, do you actually meet all the eligibility criteria? If not, SEIS will not be an option to pursue.
You also need to consider how much capital you are looking to raise – SEIS tends to work best for smaller raises of £150-250k. Are you comfortable with the equity dilution and loss of control that comes with issuing new shares? Will your target investors qualify for and benefit sufficiently from the SEIS tax breaks to motivate their investment? Importantly, will the level of working capital from SEIS provide enough to truly implement your planned growth initiatives?
Finally, do you have the resources and capabilities to handle the ongoing SEIS compliance and reporting requirements? Weighing up these considerations carefully will help assess if tapping into SEIS investment is the optimal financial move for your specific business situation and strategic goals at this time.
The Seed Enterprise Investment Scheme can potentially be an excellent way for eligible startups and early stage companies to access equity funding while also incentivising investors through attractive tax breaks.
However, it is not necessarily the right choice for every business. Carefully evaluating whether you meet the SEIS criteria, fully understanding the risks around dilution of control and follow-on funding, and exploring alternative funding options can help determine if tapping into SEIS is the best financial move to achieve your growth goals at this point in your journey. With thorough planning and analysis, you can decide if embracing SEIS investment is a wise strategy to catapult your business to the next level.
