Equity finance

Sources of equity finance

There are various sources of equity finance.

Business angels

Business angels (BAs) are wealthy individuals who invest in high growth businesses in return for equity in – ie a share in the ownership of – those businesses. Some BAs invest on their own, others as part of a network, syndicate or investment club. BAs are often experienced entrepreneurs themselves and therefore, in addition to money, they bring their own skills, knowledge and contacts to the company.

BAs can offer investment, particularly in the early or growth stages of development, in return for equity. For more information on BAs, see nibusinessinfo’s guide on business angels.

Venture capital

Venture capital is also known as private equity finance. Venture capitalists (VCs) look to invest larger sums of money than BAs in return for equity in – ie a share in the ownership of – your business.

Venture capital is most often used for high-growth businesses destined for sale or flotation on the stock market. For more information on VCs and the types of business they invest in, see nibusinessinfo’s guide on venture capital.

Crowdfunding

Crowdfunding – also known as crowd financing or crowd sourced capital – is an alternative form of business angel investment. Usually conducted online, it allows a number of investors to individually invest smaller amounts of money – usually between £100 and £10,000 – into a business. The individual investments are then pooled collectively to help a business reach its funding target.

Investors using crowdfunding will usually look for:

  • an investment requirement of between £10,000 and £200,000
  • evidence of good seed or early stage development or expansion
  • a business that shows the potential for high return
  • a business operating in a specific, perhaps high growth sector, or that the investor has a personal interest in

You can find information on crowdfunding on the Crowdcube website.

Enterprise Investment Scheme (EIS)

Some limited companies can raise funds under the EIS. The scheme applies to small companies carrying on a qualifying trade.

There are potential tax advantages for individuals who invest in such companies, such as:

  • the buyer of the shares gets income tax relief at 30 per cent on the cost of the shares
  • Capital Gains Tax (CGT) on the sale of other assets can be deferred if the gain is reinvested into EIS shares
  • when EIS shares are sold after the qualifying period, there is no CGT charge (although previously deferred gains may come back into charge)

If the borrower also qualifies for EIS income tax relief, interest on loans taken for the purpose of investing in qualifying companies is not tax deductible.

Certain conditions must be met for a company to be a qualifying company and for an investor to be eligible for tax relief. You can find guidance to the EIS on the HM Revenue & Customs (HMRC) website.

The stock market

Joining a public market or stock market is another route through which equity finance can be raised. A stock market listing can help companies access capital for growth and enable companies to raise finance for further development. It can also raise their public profile and enhance their status with customers and suppliers.

However, flotation on the stock market is not suitable for all businesses, and there are a number of points to consider.

You can find more information on UK stock markets in our guides on London Stock Exchange Main Market and the Alternative Investment Market.

Read more: nibusinessinfo.co.uk