Mark Stockdale, A&L Goodbody solicitors
Four years after the start of the financial crisis and small businesses are still having problems accessing finance with traditional sources such as overdrafts and bank term loans more difficult to secure. Companies are encouraged to be open to private equity, venture capital, and even public listing of shares on a stock market. These can be excellent sources of finance in the right circumstances, however historically companies in Northern Ireland have been reticent about ceding control of family owned companies by taking on professional investors or selling large amounts of equity.
Depending on the growth stage of the company there are two alternative sources of finance which are worth considering:
1. an issue of shares under the Enterprise Investment Scheme; and
2. borrowing from private investors though an issue of corporate bonds.
The Enterprise Investment Scheme (EIS)
EIS has been around since 2007 and is a government scheme which is intended to attract investment into early stage companies by providing generous tax incentives for investors. These incentives include a reduction in an investors' income tax liability of up to 30% of the amount invested and no capital gain tax on any increase in the value of the company's shares. In practice it means that investors will consider investing in companies which they would otherwise consider too risky.
Most companies can qualify for EIS, although there are some exceptions such as nursing home businesses and professional practices. Certain very early stage companies can qualify for Seed EIS which is even more tax friendly for investors.
Not surprisingly EIS is popular with small companies and has been used to great effect by Cambridge University which has managed an EIS investment fund for some years to help finance its spinout companies. EIS has been a common source of finance in England for some time now and we have recently experienced an increase in interest from businesses in Northern Ireland.
EIS investments are popular with wealthy private individuals who wish to offset personal income tax or shelter capital gains. For this reason, investments of this type are usually marketed towards the end of the tax year. They are also often used to structure wealth planning as shares in EIS companies are usually exempt from inheritance tax once they have been held for two years. This means that there is a larger market for EIS shares in comparison to shares in non-EIS companies.
Following an EIS fundraising a company typically has a wider shareholder base, having taken on a number of new minority shareholders. However, the company's founders usually continue to run the business as before and generally maintain control. This contrasts with a private equity investment whereby the investor will usually take a large amount of equity and require representation at board level. For this reason, EIS fundraising can be quite attractive to new businesses.
A form of financing which is often overlooked is the issue of non-transferrable corporate bonds. These are effectively loans made by individual investors to a company for a fixed period of time. Bonds are normally associated with large publicly listed companies which allow them to be traded on the London and Irish Stock Exchanges. However this does not have to be the case.
Corporate bonds are usually issued for a short period of time, perhaps four years, after which the original investment will be repaid along with interest. The advantage to investors is that they usually receive an attractive rate of interest on their investment, which may be welcome to savers in an economy where interest rates are very low. The downside is that private companies are often perceived to be more risky than public companies to invest in (although the insolvency of a large number of household names over the last few years has shown that this is not necessarily the case). The advantage to companies is that the interest rate, although high, is often still attractive when compared to traditional bank funding.
This route to financing has been popular in recent years with some well known private companies. For example, in 2011 the currency exchange provider Caxton FX raised around £4m through an issue of four year bonds with an interest rate of 7.25%. Ecotricity the clean electric group is now planning its third issue of “Ecobonds” having raised £10m though its previous two issues, the proceeds of which funded wind turbines at the Michelin tyre factory in Ballymena.
In both of the above cases the bond issues received large amounts of positive press. They were also publicly advertised to investors at conferences and in national newspapers, with Caxton running a regular feature in the Financial Times which served to also raise the company’s profile generally.
In contrast to EIS this form of financing is often better suited to more established businesses with a strong reputation and financial track record.
The fundraising process
Fundraisings by way of bond issue or share issue under EIS follow a similar process. The company will produce a short advertising document known as an information memorandum which is marketed to private investors. This is often distributed via a network of financial advisers and can be marketed throughout the United Kingdom, which means that companies are not limited just to investors based in Northern Ireland.
An information memorandum must be carefully written to comply with financial services legislation and for this reason it is important to engage a specialist solicitor and accountant with experience in this area. Experienced solicitors and accountants can also assist in providing contacts within the financial adviser market which is vital if the company is to reach investors.
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