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Kirk Rice Blog

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Raising Finance For BusinessWritten on July 13, 2017 by Kirk Rice LLP

Raising Finance For Business

Raising finance is something that most businesses need to do at some point. The majority of smaller businesses will borrow from a bank to help fund the initial costs of premises, stock, etc. More mature businesses may find opportunities that require the injection of new funds or, very often, simply need an ongoing source of finance to bridge the time gap between the incurring of costs and the gaining of revenue. Struggling businesses may seek extra cash to tide them over a difficult period of trading and to avoid (or, in some cases, merely postpone) the need to wind the operation up.

As in other fields, the tax tail should not wag the commercial dog. The fundamental choice for raising finance is between loan business finance on the one hand, and shared ownership of the business (be it equity finance, partnership, etc.) on the other. If loan finance is the choice, the next stage is to consider whether an overdraft facility is appropriate, or whether a more formal loan is required (or, probably, some combination of the two). If equity sharing is chosen, there will be all-important considerations as to the extent to which ownership and control of the business should be given up. The tax implications will be completely different depending on which choices are made.

The first key method of raising finance for your business is seeking loan finance from the bank; it is important to present your business case to the bank if you are to succeed in securing the borrowing. The banks are generally happy to lend when they have confidence they will get the money back. By presenting sound reasons for needing the loan finance, and, providing robust financial forecasts as to how the bank will get their money back, then loan finance should be straight forward. Depending on the level of the loan finance, the banks invariably require personal/director guarantees to underwrite the debt should the business fail. If you are unable to give a guarantee, then asset financing could be an option or invoice factoring.

Finance costs such as loan/overdraft interest and bank arrangement fees should be tax deductible for the company.

The other key method of raising finance for business purposes is the sharing of ownership of the business. For an unincorporated business, this will involve taking on a business partner; the partner introduces cash (or expertise or some other essential asset) and, in return, is able to share in the future income and capital growth of the business.

For a company, the process will typically involve the issue of shares.

Example

John owns all the shares in a business worth £60,000. He calculates that he would be better off in the long term if the company issues additional shares to a second shareholder. The company therefore allows Simon to subscribe for new shares with the result that John ends up owning 60% of a company that is worth perhaps £100,000. By issuing the new shares, the company has raised additional funds which it uses for business purposes. It has not had to borrow money so its profitability is not harmed.

From the company’s point of view, the transaction is straightforward. Assuming that the transaction was at arm’s length, then no tax complications arise. The company will be able to consider, going forward, whether to pay funds out, by way of dividend or salary.

In certain circumstances, it may be possible to utilise the enterprise investment scheme (EIS), a scheme designed to encourage equity investment in companies. In qualifying investments the investing individual can buy shares and obtain income tax relief for the amount invested. There is also capital gains tax relief when the investor disposes of the shares. Generally, to obtain EIS relief, the investor cannot be connected with the company, i.e. be an employee or own more than 30% of the shares. Although a director can be paid by the company, provided he was not a director prior to subscribing for the shares. EIS is a complex area and advice should always be sought before acting.

Read our factsheets for more information:

 Raising Finance

 Sources of Finance

If you would like more advice regarding this issue or any other tax matter, please contact one of our Partners, Graham Jennings  on 01344 875 000 in our Ascot office or James Moody on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk. For specialist EIS advice contact our Tax Partner Viru Patel on 01344 875000 or email info@kirkrice.co.uk

If you would like to receive Taxing Times electronically, simply email info@kirkrice.co.uk stating Taxing Times Article in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.

 

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