Six sources of equity finance
There are various sources of equity finance, including:
1. Business angels
Business angels (BAs) are wealthy individuals who invest in high growth businesses in return for a share in the business. Some BAs invest on their own or as part of a network. BAs are often experienced entrepreneurs and in addition to money, they bring their own skills, knowledge and contacts to the company. See business angels.
2. 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.
Venture capital is most often used for high-growth businesses destined for sale or flotation on the stock market. See venture capital.
Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. This money is combined to help you reach your funding goal. Each individual that backs your idea will usually receive rewards or financial gain in return. See crowdfunding.
4. 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 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
Certain conditions must be met for a company to be a qualifying company and for an investor to be eligible for tax relief - see HM Revenue & Customs (HMRC) EIS guidance.
5. Alternative Platform Finance Scheme
If your small business is struggling to access bank finance, there is now a new government scheme in which the UK's biggest banks will pass on details of any businesses they have rejected to three alternative finance providers. These are:
6. 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 raise finance for further development - see London stock exchange: main market.