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Author: Sacha Bright & Oliver Murphy
Coronavirus poses an existential threat to small businesses in the UK. As Nextfin has reported, while the expansion of the Chancellor’s relief package goes some way to support previously excluded early-stage companies, large parts of the sector remain without support of any kind.
Not only this but with fears of taking on additional loans they may not be able to pay back, many early-stage businesses are reluctant to utilise the government’s Coronavirus Business Interruption Loan. According to research from MarketFinance, only 52% of businesses are considering applying the scheme.
But in these challenging times, as well as periods of normality, there are ways for struggling businesses to seek the funding they need: is equity crowdfunding the answer?
Conventional methods of equity funding, such as through business angels and follow-on Series A venture capitalist funding, usually require meeting face to face to establish trust. But with the outbreak of Covid-19, such actions are out of the question and have been restricted by national governments.
With social distancing posing a significant practical challenge for businesses seeking capital, equity crowdfunding offers a solution. With the fundraising process taking place online, equity crowdfunding is the perfect way to raise capital from investors across the whole country without having to meet them face-to-face. This provides social distance for the investor as well as a company’s employees.
As NextFin has demonstrated, while the government’s CBILS will undoubtedly help many small businesses, there will be those who face the prospect of going under. Reports show 62% of companies only have around three months’ funds in reserve and nearly one in five have less than a months’ cash as revenues continue to fall. The government needs to put in an equity solution as soon as possible, as many of these businesses do not qualify for a loan.
Startups and early-stage businesses form the backbone of the UK economy. Indeed, there were 672,890 startups founded in the UK between 2018/2019. But yet, many face an immense struggle accessing regular forms of finance such as bank loans, with a lack of assets impeding their chances to prove their creditworthiness.
The World Bank Group has revealed the importance of small businesses for job creation and economic output, with studies establishing a link between the size of a country’s SME sector and the health of its economy. Yet, despite their positive contribution, many small businesses face going under - especially with the outbreak of coronavirus. It is interesting to note that the UK is considered the European capital for start-ups.
According to the Enterprise Investment Scheme Association, based on the responses of 250 growth businesses, 9 out of 10 face the prospect of going under if the government does not take urgent action to encourage investment into early-stage businesses.
So, faced with the prospect of going under many businesses will be looking to raise capital until things return to normal. If you really need to survive and don’t have the cash to get you through the hard times, then speak to your customers, suppliers, friends, family, high net-worth individuals, even competitors, about the potential for them to hold a stake in your business.
Equity crowdfunding can facilitate these investment processes fast, avoiding unnecessary duplicated due diligence procedures associated with Angel investment. Such procedures can take up to three months and are repeated with each investor. Regulated equity crowdfunding sites are required to undertake basic due diligence procedures on the companies they market for funding. Some also offer a shareholders agreement and a nominee service, which speeds up and streamlines the whole investment process.
Although equity crowdfunding is risky for investors, as they could lose all their money, expansion on the EIS and SEIS will remove some of the risk. NextFin provides detailed ratings on companies seeking equity crowdfunding, allowing investors to make informed decisions.
In light of this, if the government expands the EIS and SEIS and co-invests on equity crowdfunding sites, we could save addled companies while securing thousands of jobs and protecting the UK’s position as the high-growth start-up capital of Europe.
Disclaimer:
To the best of our knowledge, the information we have provided is correct at the time of publishing. SEIS and EIS tax benefits are dependent on your financial circumstances. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
Risk Warning:
Investing in equity crowdfunding and early-stage businesses involves high risks, which may include long-term investment horizons, illiquidity, lack of income and potential dilution. Any investor needs to be in the position to afford a total loss of capital invested.
NextFin is targeted at members who have the knowledge and experience to understand these risks and make their own investment decisions. You will NOT invest through NextFin but through the relevant crowdfunding website which also has signed off the content as a Financial Promotion on its own website. NextFin is not the originator of the financial promotions that appear on its site. However, we do to the best of our ability carry out limited compliance checks on the originator and the company seeking funding to ensure they are conforming to FCA regulations and anti-money laundering equity/requirements as appropriate. Business Agent Limited, trading as NextFin, takes no responsibility for this information or for any recommendations or opinions made by the companies or its users. Click here for our full risk warning.
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