Even those new to investing have already heard that investing in a large, established business is a guarantee of ensuring returns. Thus, it is common practice for financial advisors and consultants to recommend investing in blue-chip companies such as Tesco or Aviva.
Startups and small businesses, meanwhile, have been perceived as risky investments that come with a real possibility of losing the capital you invested.
However, with the rise in the use of technology and social media in recent years, as well as an increasingly interconnected business environment, small businesses have been able to catch up and today comprise around 60% of the total Gross Value Added by enterprises to the UK economy.
Because of this, there is a great need and an even greater potential for success than ever before when it comes to investing in these new businesses.
From tax breaks such as the Seed Enterprise Investment Scheme (SEIS) Reinvestment Relief to the potential to shape the national economy, here are some reasons and incentives to opt for investing in small, early-stage enterprises instead.
Tax Relief
To encourage investments in startup enterprises, the UK government offers the SEIS Tax Relief, which provides tax breaks to individuals who invest capital in early-stage or small companies.
For a company to qualify to raise money through SEIS, it must have been trading for two years or less and must have fewer than 25 full-time employees and £200,000 worth of gross assets at the time the investor avails of the shares.
Individuals who invest in such companies are eligible for the following benefits:
- Up to a 50% Relief on Individual Income Tax
- Exemptions on Capital Gains Tax and Inheritance Tax on the shares
- Up to 50% Relief on Capital Gains Reinvestment Tax, when profits from other non-SEIS investments are used to invest in a SEIS-eligible company
- Loss relief in case the company invested in performs poorly
Greater Return Potential
Large companies have long had their assets and revenue valued in the millions, which means that any growth in profit — even growth worth millions — represents only a small percentage of the base amount.
Furthermore, such companies are likely to have a large number of shareholders, among whom the dividends will be divided accordingly. Thus, while investing in large companies guarantees returns, there is limited potential for a large payout with such investments.
In contrast, new businesses have a much lower base of assets and revenue. Thus, it is easier to achieve growth rates in the double digits, as even a small amount represents a large percentage of a likewise small base.
Also, small businesses are unlikely to have more than a handful of investors, meaning a greater share of the dividends per investor. This means a greater potential to receive large returns when you invest in small business.
Improve Innovation and Economic Growth
About 96% of companies in the UK are classified as small enterprises and contribute 60% of all jobs. Studies have also shown that small enterprises help advanced economies continue to adopt new forms of technology and develop innovation.
Investment in small, early-stage businesses, therefore, helps contribute to a more innovative and business-friendly society. This, in turn, spurs economic growth and creates even more investment opportunities in the future.
Through this ripple effect created, small enterprises drive the country’s innovation, productivity, and economic growth. Making such an investment is thus rewarding not only for the individual investor but also for the economy and society as a whole.
Small has never been more beautiful. Be a first mover and start investing in an early-stage enterprise today.
