Raising Finance by Selling an Equity Stake in Your Business: A Viable Option

Posted on 05.02.2014

With 2014 being a year of growth for many businesses, as we have talked about before in this blog, the question is how is that growth going to be financed?

Whilst there is evidence to suggest that banks are dipping their toes back into the market and avenues for alternative sources of finance continue to grow, one area of funding that is under-utilised and little understood is equity.

A recent report issued by the CBI, ‘Slice of the Pie: Tackling the Under-Utilisation of Equity Finance’, has revealed that just 3% of small and medium-sized businesses use this type of finance.

Raising equity to release cash involves shareholders selling a slice of their business and yet for many business owners this is a step too far. Not unsurprisingly the report reveals that the biggest barrier to improved demand for equity finance is the perception of losing ownership. 46% of businesses say they will not considering using equity finance due to concerns about losing ownership and decision-making power.

The CBI survey finds though that 68% of those firms which have raised finance this way believe that the investment had a positive impact on their business. As a result, four out of five of these businesses said that they would use additional equity finance to fund their business growth in the future. Bringing in new capital has also helped 26% of businesses gain additional external finance.

These businesses are ready-made advocates of equity finance, with 81% saying that they would recommend equity finance to another business.

Against the background of these benefits the CBI has recommended the following actions:

  • All parties should proactively promote the benefits that equity finance can bring to a business and dispel the myths about it being a less attractive form of finance
  • The government’s soon to be launched Business Bank should develop an equity/finance option to help ease businesses concerns about losing control.
  • Government should trial adjusting the criteria of its equity co-investment schemes, such as Business Angel Co-Investment Fund and Enterprise Capital Funds,
  • Government should pilot a simple tax incentive to encourage retail investors to hold shares on a longer-term basis
  • HMRC must streamline the application process for small and medium-sized businesses to gain Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) qualifying status

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