HOW TO ChoosE the Right Funding Path: A Deep Dive into SEIS

In the dynamic landscape of startups and small businesses, securing funding stands out as a pivotal challenge.

Traditional banking avenues have grown increasingly complex, pushing companies to explore diverse funding options for their expansion plans. One such option that has gained traction is the Seed Enterprise Investment Scheme (SEIS), initiated by the UK government in 2012. By offering tax incentives to investors and simplifying the equity financing process for qualifying businesses, SEIS aims to encourage investment in early-stage ventures. But how can you determine if this scheme aligns with your business's funding needs?

In this comprehensive exploration, we will closely examine SEIS, weighing its potential advantages and risks, and helping you gauge if it serves as a viable funding avenue for your emerging or evolving business.

Understanding SEIS

The Seed Enterprise Investment Scheme (SEIS) allows investors to reclaim up to 50% of their investment from income tax obligations by investing in eligible startups. Moreover, investors are exempt from paying capital gains tax on the sale of SEIS shares, subject to specific conditions. There are additional benefits, including loss relief against income tax and the ability to offset capital losses against income tax or capital gains tax liabilities.

To qualify for SEIS, businesses must meet certain criteria. They must be unquoted, employ fewer than 25 individuals, and possess gross assets below £200,000. The company should engage in a new trade and be less than 2 years old when shares are issued. Certain types of trades and activities are eligible, specifically catering to early-stage UK companies seeking initial funding rounds ranging from £50,000 to £250,000 in their first pre-seed stage and £500,000 to £1.5 million in their seed round, on average. This injection of capital is particularly crucial during the nascent stages of a startup, enabling them to take off and flourish.

Benefits of SEIS

SEIS offers a multitude of advantages, making it an appealing choice for startups and early-stage firms seeking equity financing. One of its most significant benefits is the substantial income tax relief it extends to investors.

Under SEIS, individuals can mitigate their income tax liability by 50% of their investment cost, up to a maximum of £100,000 annually. This relief applies to the tax year when the shares are issued, providing a timely financial benefit, especially for high-rate taxpayers. Additionally, there is a capital gains reinvestment relief, allowing investors to reinvest capital gains without incurring capital gains tax, provided they meet specific conditions. If SEIS investments result in losses, investors can claim loss relief against their income tax liability, offsetting up to 45% of the losses incurred.

Deferred capital gains tax is another valuable feature, enabling investors to defer capital gains made in the previous tax year until after disposing of the SEIS shares. As long as the SEIS shares are held for at least 3 years, investors pay no capital gains tax on profits generated from their eventual sale.

Risks and Considerations

Despite its advantages, SEIS carries inherent risks and considerations that necessitate careful evaluation. Issuing new shares translates to relinquishing equity in your company, which demands meticulous management to avoid dilution of control.

Eligibility for SEIS investment demands strict adherence to criteria regarding the business's age, number of employees, gross assets, and more. Failure to meet these prerequisites results in forfeiting the associated tax benefits, underscoring the importance of compliance. Additionally, there is no assurance of follow-on funding beyond the initial SEIS raise, requiring companies to secure additional funding for subsequent growth phases.

Consideration must also be given to the timeframes involved. It can take 8-12 weeks for investors to receive the essential SEIS tax relief certificates from HMRC after their investment. Moreover, restrictions on the utilization of SEIS funds, such as acquisition of assets and adherence to qualifying business activities, pose additional challenges. Businesses must be vigilant to avoid breaching eligibility criteria post-SEIS funding, as this jeopardizes the scheme's status retroactively, endangering the associated tax benefits.

Assessing Financial Needs

Regardless of your interest in SEIS, a thorough evaluation of your startup's financial needs is paramount. Seeking consultation or advice and diligently considering these requirements before making decisions is prudent. Accurate estimation of operating expenses, including office space, staff costs, and equipment, is fundamental.

Developing a 12-18 month financial model to project expenses and revenue provides clarity on required funding pre-profitability. Utilizing quoting software aids in planning and securing profitable clients, allowing for the incorporation of buffers for unforeseen costs. Exploring alternative funding avenues such as crowdfunding and angel investors, while establishing clear fundraising goals and milestones, is also advisable.

Alternatives to SEIS

While SEIS is a viable funding option, several alternatives cater to different business needs. Crowdfunding platforms like Kickstarter and Seedrs enable startups to raise equity or debt financing from a diverse online investor pool. Besides capital, these platforms foster community engagement, a valuable asset for startups. Government grants and nonprofit organization loans provide financing without relinquishing control or ownership. Schemes like Start Up Loans offer accessible early-stage funding, covering expenses such as equipment, property, and marketing.

Angel investors, a source of both capital and industry expertise, are another avenue for startups. For enterprises requiring larger-scale funding, venture capital firms and private equity investors offer substantial investments in exchange for equity stakes.

Is SEIS Right for Your Business?

Determining if SEIS aligns with your startup's funding needs hinges on several crucial questions. Firstly, thorough evaluation of eligibility criteria is essential; if your business does not meet the requirements, pursuing SEIS is not an option. Assessing the capital amount needed is equally vital; SEIS is most effective for smaller raises ranging from £150,000 to £250,000. Contemplating the equity dilution and loss of control resulting from issuing new shares is essential.

Furthermore, understanding whether your target investors qualify for and benefit significantly from SEIS tax breaks is key. Equally significant is gauging whether the SEIS working capital adequately supports your planned growth initiatives. Lastly, evaluating your resources and capabilities to manage ongoing SEIS compliance and reporting requirements is critical.

In essence, while SEIS holds promise as an avenue for equity funding, it is not a one-size-fits-all solution. Careful consideration of SEIS criteria, potential risks, and alternative funding avenues is imperative. By engaging in meticulous planning and analysis, you can make an informed decision, determining whether embracing SEIS investment aligns with your business's strategic goals and growth trajectory.

Speak to Zyla Accountants today about funding opportunities. Our friendly team of accountants will be able to offer the support you need for your business.