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2.1 Growing Finance2.1(a) Business planning
(i) Choose the right finance when starting up
Every new business needs money when starting up. For the majority of businesses, equipment will need to be bought, the workplace established and marketing costs met - all before the first sale is made. Then once you're trading, you'll need cash to pay the bills and keep the business going.
There is a range of financing options. Choosing the right ones for your needs is essential. You can use your own money, borrow from banks, family and friends or attract outside investors. Grants and government support may also be available.
Most businesses use a combination of these, tailored to their specific needs and circumstances.
The set of highlights described below looks at how to work out how much money you need, the best financing options for your business and their advantages and disadvantages.
* Work out your financial requirements
* Choose the best financial option
* Use your own money to set up your business
* Use finance from friends and family
* Use bank finance to start your business
* Get outside investors to help finance your business
* Grants and government support
* Other sources of finance
(ii) Get the right finance and assess your finance readiness
Choosing and securing the right type of finance for your business is essential.
There are many different types of finance available - each of them designed to meet different needs. This tool can help you by providing a personalized list of the most suitable finance options for your business and an assessment of your readiness to seek such finance.
(iii) Use your business plan to get funding
A business plan is essential for your enterprise. Whether your business is starting up or established, the business plan is the roadmap for future development.
It is a key document when you are looking for business funding - whether applying for a simple overdraft or looking for new investment or capital.
The set of highlights described below explains how to present your business plan to a variety of people, including potential investors, shareholders and your bank.
The business plan helps them understand your vision and goals for the business, how you are going to spend the invested or borrowed money and how this will benefit the business as well as potential funding providers.
It is the first source of information that most providers of funding see about a start-up company and is crucial in getting their attention and interest. The set of highlights described below sets out the key elements that they will be looking for.
* The essential elements of a business plan
* Tailor your business plan to the target audience
* Demonstrate your commitment to the business
* Getting the best from your business plan - key considerations
(iv) Decide whether to lease or buy assets
To be able to operate successfully, your business will need to acquire assets or capital equipment, such as plant or machinery.
These assets may include office furniture, computer equipment, company vehicles, engineering machines or service equipment.
You could buy all of this equipment outright, or you might decide to rent or lease it instead. There are advantages and disadvantages in both options. The set of highlights described below explains how the choice between buying and leasing can affect your business.
* How to finance assets
* Types of leasing
* The pros and cons of buying equipment outright
* The pros and cons of leasing or renting business equipment
* The tax implications of buying and leasing equipment
* Buying assets: understand depreciation
* Choose a finance company
2.1(b) Borrowing
(i) Borrow money tax efficiently
Most businesses will need to borrow money at some point. This may be during the start-up phase or to fund the purchase of new equipment, for example.
It is possible to cut the cost of borrowing by doing it in a way that reduces your overall tax bill. Tax relief on borrowings is not sufficiently exploited by some businesses.
Tax relief may offset the costs of some types of borrowing - though not all. Careful consideration must be given to the implications of all borrowing.
The set of highlights described below illustrates some tax-efficient methods of borrowing. For example, if you intend to rent or lease assets, borrow in order to buy assets, or perhaps borrow from the directors' pension scheme.
* Tax relief on renting or leasing an asset
* Tax relief on borrowing to purchase an asset
* Examples of tax relief when acquiring an asset
* Borrow money for capital investment from pension schemes
* Claim loan interest against tax
* The Enterprise Investment Scheme
(ii) Loans and overdrafts
Whether you are starting a business, expanding it or investing in it to stay competitive, you may need to borrow money. You may want external finance to cover day-to-day expenses when developing your new product, service or marketing strategy until your business generates enough surplus cash to meet these costs. Alternatively, you may want to borrow money to cover the cost of new equipment or premises.
The set of highlights described below looks at the advantages and disadvantages of loans and overdrafts - two popular sources of finance - and the purposes for which they are best suited. It provides practical help when choosing a loan or overdraft, taking you through the options available from high street banks and building societies as well as companies offering unsecured loans.
It also gives guidance on how to raise your chances of success when approaching a lender, for example by using a finance broker, and lists the main sources of borrowing including specialist loan providers.
* Loans
* Where to look for a loan
* Obtaining a loan and offering security
* Overdrafts
* Loans from friends and family
* Providing a guarantee for your loan
* The Small Firms Loan Guarantee
(iii) Financing from friends and family
It's common for owners of small and start-up businesses to look to relatives and friends for support when they need additional business funding.
This can work well, but often these arrangements are informal and based purely on trust and verbal assurances.
The set of highlights described below explains the benefits of borrowing and investment from friends and family and how to avoid misunderstandings by setting up a formal finance deal that is legally binding. It also outlines the tax implications of loans for you and the lender.
* Loan or investment?
* Benefits and pitfalls of friends and family finance
* Setting up a loan or investment with friends or family
* Legal agreements
* Tax and finance from friends and family
(iv) Commercial mortgages and lenders
If you decide to buy property for your business, you will probably need a commercial mortgage. Before you take one out, it is essential that you consider the maximum monthly mortgage repayment your business can afford. You should also take into account the potential growth of your business, as relocating too often can be costly.
The guide explains what information a commercial mortgage lender will need from you, what kind of professional advice is available and what the various costs are. It also looks at the pros and cons of buying compared with renting, explains how to choose a lender and where to get further help.
* An overview of the commercial mortgage
* Pros and cons of buying business premises
* What lenders need to know
* Different types of lender
* Repaying a commercial mortgage
* Commercial mortgage fees and costs
* Finding a lender
2.1(c) Shares and equity
(i) Equity finance
Equity finance is a way of raising share capital from external investors in return for handing over a share of the business. This may take many forms including a share of future profits, but is most frequently associated with sharing the ownership of the business to some degree.
The two main providers of equity finance for private businesses are venture capitalists - also known as private equity firms - and business angels.
The set of highlights described below explains what equity finance is, examines the benefits and drawbacks and gives advice on when it might be the best option for your business. It also explains how to obtain equity finance and where to get more information.
* What is equity finance and is it right for your business?
* Business angels
* Venture capital
* The equity gap
* Advantages and disadvantages of equity finance
* Securing equity finance: preparation
* Securing equity finance: pitch
* Are there alternatives to equity finance?
(ii) Shares and shareholders
Selling shares in your company is one way of raising long-term finance for your business. This is also known as equity finance. The advantage of equity finance is that you don't have to repay the finance or pay interest on it as you would with an overdraft or bank loan.
Shares represent ownership in a company. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the distributed profits of the company, known as dividends.
The set of highlights described below will explain how shares are issued and sold, what dividends are and the tax implications associated with dividends.
* What are shares and why are they issued?
* How are shares issued?
* Types of shares
* Sale and transfer of shares
* Paying dividends and paying tax
* Making changes to share capital
(iii) Floating on a stock market: your options
A stock market flotation involves selling a percentage of your business in the form of shares on one of the stock markets. There are three stock markets in the UK. At the top is the main market of the London Stock Exchange, which is generally populated by large companies, and then there is the Alternative Investment Market (AIM) and PLUS, both of which are specifically designed for smaller companies.
Floating on the stock exchange can be time-consuming and costly so is not suitable for all businesses. You might consider it if you want to raise capital, or have private investors or an owner-manager that wants to cash in on their investment. It can also help you increase your business' profile and motivate your employees by issuing them with shares.
The set of highlights described below explains the advantages and disadvantages of floating on a stock exchange. It sets out the features of the different UK markets, how to appoint advisers and how to prepare for a float.
* Is your business suitable for flotation?
* What is a flotation and why consider it?
* Advantages and disadvantages of flotation
* Choose the right market
* Appoint your advisers
* Prepare for a flotation
* Price your business' flotation
* The flotation process
2.1(d) Grants and government support
(i) Grants: the basics
A grant is a sum of money given to an individual or business for a specific project or purpose. A grant usually covers only part of the total costs involved. However, as long as you keep to any conditions attached to the grant, you will not have to repay it or give up shares in your business. Grants to help with business development are available from a variety of sources, such as the government, European Union, Regional Development Agencies, Business Link, local authorities and some charitable organizations. These grants may be linked to business activity or a specific industry sector. Some grants are linked to specific geographical areas, e.g. those in need of economic regeneration. The set of highlights described below introduces you to some of the grants available to businesses in the UK and outlines the kinds of projects and organizations they are available to. It also provides hints on improving your chances of being awarded a grant. * Government grants and support
* What kind of grants are available?
* Other types of business grants available
* Grant eligibility
* How to apply for a government grant
* Why a grant application might be turned down (ii) Innovation, research and development grants
The UK government encourages innovation and research and development (R&D) projects among businesses. If you plan to research and develop new products or services, you can get free information and advice and may also be eligible to apply for financial support, in the form of an R&D grant. These grants cover research and development of new technologies and innovative products or processes. Applying for an R&D grant usually involves completing application forms and demonstrating how you satisfy the funding conditions and requirements. An effective application is essential if you are to maximize your chances of obtaining a grant. Any guidelines given with the application should be closely followed. The set of highlights described below highlights some of the grants that are available for R&D work. * The different sources of government funding * The Government Grant for Research and Development * The EU Framework Programme
* EUREKA
* Collaborative Research and Development
* Other sources of funding
(iii) Support networks and facilities for innovation and R&D
Business success often depends on innovation. In the UK a wide range of initiatives are available to help small businesses make the most of their research and development programmes. Schemes and networks supported by the government offer businesses access to expert advice from specialist organizations as well as other businesses. These include Chambers of Commerce, InnovationRelayCenters and online networks. As location can also be a vital factor in the success of your business, science parks and assisted areas have been established to help companies grow and to promote science and technology. The set of highlights described below explains what support is available. It covers schemes and networks that provide practical advice or that can put you in touch with others that can help. It also explains how science parks and similar environments work and how they could benefit your business. * Development agencies
* Virtual support networks
* Innovation Relay Centers
* Business innovation centers
* Assisted areas and business clusters
* Science parks
* Chambers of Commerce and local networks
* Knowledge transfer schemes
(iv) Find support for inventors
Every year thousands of people think they may have invented a unique product or component. But there's a lot of work to do before it can be exploited commercially - from checking that your invention is original, to building a prototype. There's a wide range of support available to individual inventors and small businesses looking to develop innovative ideas and technologies. The set of highlights described below explains where inventors can get the support and advice they need at different stages of their product's development. * Help in establishing your invention's originality * Get legal help on intellectual property
* Take your invention to market
* Get support from other inventors
* Help developing your idea
* Find manufacturers to build a prototype
* Help to ensure products are safe
* Attract funding for your invention
(v) Work with UK universities and colleges
Innovation - the successful exploitation of new ideas - is vital to the survival and prosperity of British firms. Businesses can develop new ideas by forming relationships with universities and other research institutions. Research encourages innovation, gets new products and processes to the market faster and makes UK industry more competitive. Companies benefit from research into processes and technologies relevant to their activities, while universities and colleges gain new sources of funding and researchers achieve a better understanding of industry needs. The set of highlights described below looks at the different ways you can work with universities or colleges. It also looks at key government-sponsored schemes supporting partnership projects. * Research councils and government help
* Knowledge Transfer Partnerships
* Knowledge Transfer Networks
* Collaborative Research & Development
* Shell Step
(vi) Tax reliefs and allowances for research and development
Businesses that carry out research and development (R&D) can often reduce their tax bills by claiming relief for some of their R&D expenditure. There are two systems in place - R&D tax allowances and R&D tax reliefs. R&D tax reliefs are only available to companies subject to corporation tax while R&D tax allowances are available to all businesses that have a qualifying R&D spend. The set of highlights described below provides an outline of what is meant by R&D for the purpose of these reliefs and what types of expenditure can qualify for relief. It also explains R&D tax allowances and covers some of the details of the R&D tax relief schemes for small and large companies. * What qualifies as R&D for tax purposes?
* R&D tax allowances
* R&D tax reliefs - the SME scheme
* R&D tax reliefs - the large company scheme * How to claim R&D tax reliefs
(vii) Tax advantages for those starting up in business
New businesses can benefit from a variety of tax allowances and reliefs which could cut their tax bill. They include capital allowances for investment in equipment and premises, tax relief and credits for spending on research and development and stamp duty relief in disadvantaged areas. But you won't automatically receive these tax advantages. You need to find out what you can claim and then apply for them. The set of highlights described below gives an overview of the schemes available and tells you where you can find out more. * Details of tax advantages for new businesses
* Here's how the tax authorities helped me start my business (viii) Capital allowances: the basics
As a business you can claim tax allowances, called capital allowances, on certain purchases or investments. This means you can deduct a proportion of these costs from your taxable profits and reduce your tax bill. Capital allowances are available on plant and machinery, buildings - including converting space above commercial premises to flats for renting - and research and development. The amount of the allowance depends on what you're claiming for. In some cases, the rates are different in the year you make the purchase from those in subsequent years. The set of highlights described below will tell you what purchases or investments qualify for a capital allowance, how much you can claim and the simplest way to make your claim. * Capital allowance on plant and machinery
* Capital allowance on buildings
* Research and development capital allowances * Work out your capital allowance claim
* Claiming capital allowances
* Special cases - capital allowance
(ix) First-year allowances
First-year allowances are a tax allowance you can claim on certain purchases or investments in the year you buy them. Small businesses can claim first-year allowances of 50 per cent for qualifying investments. Medium-sized businesses can claim 40 per cent, and in certain circumstances both small and medium-sized businesses can claim allowances of 100 per cent, in the year they make the purchase. However, for most plant and machinery, 25 per cent is the usual capital allowance. There are also allowances for investment in research and development. From April 2008, first year capital allowances will be replaced by an Annual Investment Allowance of £50,000 for all businesses. The set of highlights described below explains the different types of first-year allowance and what you need to do to claim them. * What's eligible for first-year allowances? * Work out your allowance
* Claim first-year allowances
(x) Capital and incentive allowances interactive tools
Use this interactive tool to help you reduce your tax bill by identifying the capital and incentive allowances that your business can claim. Expect to spend between four and ten minutes answering a series of simple questions with yes/no answers. At the end you'll get: * Advice on whether the allowances you've investigated apply to your business * One or more links to detailed information on that allowance * A link back to the start of the tool so that you can investigate other allowances The results are only as good as your answers to the questions. They will provide a strong indication of whether you can claim allowances - but you may need to seek further advice from your accountant, or contact your own tax office for an answer that takes into account all your particular circumstances. For most businesses, the plant and machinery interactive tool is the most relevant one. But we recommend you explore all four to be sure you don't miss out. * Incentive scheme interactive tool
* Low emissions interactive tool
* Plant and machinery interactive tool
(xi) Online transactions with government
Online communication with government can save you time and money. Over the coming years, some government departments will make online returns and reporting compulsory. There is an interactive tool available for it, it: * Identifies which of the most frequently used online reporting & submission services apply to your business * Links to the enrolment page for the services (xii) Find out if you can claim R&D tax relief
Businesses that carry out research and development (R&D) can often reduce their tax bills by claiming relief for some of their R&D expenditure. By answering a simple series of questions, you can get for most businesses a clear idea of whether they are eligible or not. Please note: this technique is intended to provide useful guidance and should not be used as the only source of information when determining your eligibility. If in doubt, seek professional advice. Important:
* Am I eligible for R&D tax relief? |