The Enterprise Investment Scheme Association (EISA), responsible for liaising with the Government on behalf of members investing in early stage growth businesses through the tax incentivised SEIS and EIS schemes, is warning the Government that 6 out of 10 EIS backed companies are likely to fail within 12 months unless investors can be attracted by improved EIS terms.
A survey of 125 businesses, undertaken on behalf of the EISA by Leeds University Business School, highlights the importance of the EIS and SEIS schemes, which since inception have raised £22 bn, in accessing investment for early stage growth businesses.
Of the businesses researched, 97% emphasised the importance of the schemes. 70% reporting increased turnover by over 50% with the average increase being 190%. Companies also attributed their EIS funding with strong employment growth. Average employment growth was 86% and for every £1M of investment, 4 immediate and sustainable jobs were created. Overall each company surveyed reported, as a direct result of their EIS investment, they were immediately able to employ 6 additional people.
Notwithstanding the critical value of the incentives, the impact of the 2020 pandemic saw a year on year reduction by a third of the investments made in the second quarter of the year.
Furthermore, in the absence of investors, 7 out of 20 businesses looking for alternative sources of cashflow had their applications for Government guaranteed COVID loans declined by their bank.
As a result, 6 out of 10 of all the businesses researched advised that they risk failure withing 12 months unless they are able to attract liquidity, nearly two thirds of which will fail in just 6 months.
Director General of the EISA, Mark Brownridge said, “The findings of the survey based on data from Beauhurst are stark. The uncertainties caused by the pandemic have caused many investors to hold back in 2020 leaving an estimated funding gap of £6.5bn across seed, venture and growth need, which even with the benefit of a Government guarantee behind them, banks have not been able to fill. Many early stage growth businesses have no option but to rely on risk capital from investors, who in turn invest with the benefit of tax incentives. It is clear that without the Government improving these incentives right now, we will lose many of the potential businesses of the future, and the associated employment opportunities.”
The EISA is lobbying the Government to review four specific aspects of the schemes:
- An increase in the lifetime SEIS limit from £150,000 to £250,000
- Replacement of the ‘age restriction’ on eligible recipients of State Aid with a different threshold
- Assurances from Ministers that they will support a continuance of the EIS and SEIS schemes beyond the current commitment to 2025
- An assessment into how monies held in pension funds can be used to fund EIS and SEIS qualifying companies
The research was led by Professor Nick Wilson of Leeds University Business School. He said: “This study set out to look at the impact of Covid-19 on the UK’s equity finance ‘eco-system’ and the experiences and prospects of equity funded firms.
“The results show a finance gap for the high technology and knowledge intensive firms that are key to generating the growth and innovation required to meet the challenges of the future and address the levelling-up agenda. The analysis reveals regional disparities in the provision of equity finance and a shortage of growth capital to support larger and longer term investments”
Mark Brownridge added, “For very good reasons substantial budgets have been made available this year to support businesses. By relaxing the four areas we have now identified for EIS and SEIS scheme investors will have a disproportionate benefit to the economy over the medium and long term, and we very much trust that the Government will give them serious consideration.”