A business can grow in a number of ways that are classed as either organic or inorganic. Whichever way your business decides to go, your starting point will always be to evaluate your accounts and truly understand where the money you have is going, and what it is doing. Once you have a firm base, you can then explore which of the two options are better for you and your business.
How to grow organically
Internal growth is known as organic growth and happens when a business expands its own activities by launching new products, entering new markets or taking advantage of new technologies. Businesses do this to improve their chances of increasing customers, revenues and therefore profits.
A company seeking the organic growth option might look to seek internal sources of finance such as:
- Retained profits
- Selling assets
- New products
- Additional revenue streams
Using other people’s money
Using other people’s money is an inorganic way of establishing business growth and might be as simple as going to friends and family, the bank, or investors after you’ve identified how much your business needs. However, there is always a risk – and borrowing money without the guarantee of paying it back can cause more stress than it’s actually worth.
Another way to grow inorganically can arise from mergers and takeovers as well as investment schemes such as EIS, VCT and SEIS.
The EIS, SEIS and VCT reliefs were introduced to provide incentives to investors to invest in small unquoted companies, which are generally perceived to be higher-risk investments.
Investors are granted tax relief, which makes purchasing some of your company’s shares more appealing to them.
The Enterprise Investment Scheme (EIS)
Established by the UK government in 1992, EIS has raised around £20 billion since its inception.
If your company qualifies, you can raise up to £12 million in EIS funding – up to £5 million in any 12-month period.
These figures include funds raised through not only EIS but also SEIS, venture capital trusts, social investment tax relief, and some kinds of state aid.
The money you raise with each new issue of EIS shares must:
- Be used to grow or develop your business
- Present a risk of loss of capital for the investor
- Not be used to buy all/part of another business
- Be spent within 2 years of the investment or the date you started trading (if later)
The Seed Enterprise Investment Scheme (SEIS)
Set up in 2012, this scheme was established to support companies in the very early stages of growth and that are considered much higher risk than later start-ups supported by EIS funding.
While it works in a similar way to EIS funding, the guidelines are tailored around the needs of smaller companies. Because it supports higher risk companies, there are even greater tax relief benefits for investors.
To be eligible for SEIS a company must:
- Raise up to £150,000 (vs. £12 million EIS)
- Have been trading for less than 2 years (vs. 7 years EIS)
- Have fewer than 25 employees (vs. 250 EIS)
- Have no more than £200,000 in gross assets (vs. £15 million EIS)
SEIS investors enjoy largely similar tax relief benefits to EIS investors, but the main differences are:
- Investors receive 50% income tax relief against the amount invested (30%)
- They can write off CGT up to 50% of the amount invested in the same tax year
Venture Capital Trusts (VCT)
VCTs invest in smaller, VCT-qualifying companies that are not listed on the main London Stock Exchange. These smaller companies have the potential to grow much faster than their larger, listed counterparts. There are numerous tax benefits to investors but to receive VCT funds a company must:
- Have a permanent establishment in the UK
- Carry out what HM Revenue & Customs calls a ‘qualifying trade’
- Have gross assets of £15 million or less at the time of the investment, or £16 million immediately afterwards.
- Have fewer than 250 full-time employees when the investment is made.
Whichever funding you qualify for, you need to understand how to pitch to investors and you also need to be prepared to give away some of your company.
Pitching to investors requires cleaning up your data and knowing your numbers. What’s actual profit and what is just cash ‘sloshing’ around?
If you’re interested in learning more about the profit in your business, then you can sign up for course, The Profitable Solopreneur!
Until next time,