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Launching a tech business is a thrilling yet challenging undertaking requiring enormous capital to get off the ground. While there are several funding routes available, many technology companies choose Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) funding due to several advantages it offers.
SEIS/EIS is a UK government effort encouraging private investors to invest in early-stage startups by providing them significant tax benefits. From the financial boost, it offers to the expertise and connections of shareholders, we will cover why SEIS/EIS funding can be a successful, cost-effective, and encouraging way for tech startups to secure capital and grow their companies.
In this blog, we will know how to get funding at an earlier stage and the top five reasons why SEIS/EIS funding is the most effective funding path for tech startups.
Table of contents
● 5 reasons why SEIS/EIS is the best funding route for tech startups
● Final thoughts
5 reasons why SEIS/EIS is the best funding route for tech startups
1. Tax incentives
SEIS/EIS provides significant tax incentives to shareholders, making it a more appealing investment option for early-stage businesses, particularly tech startups.
These tax incentives involve income tax relief, inheritance tax relief, and capital gains tax relief. For instance, SEIS allows investors to deduct up to 50% of their investments from income taxes, up to a maximum of £200,000 for the 2023-24 tax year. The threshold was £100,000 till the 2022-23 tax year.
Under EIS, shareholders can claim income tax relief of up to 30% of the sum invested, with a maximum benefit of £1 million per year. In addition, if the money invested is held for at least three years, any capital gains made on the capital are exempt from capital gains tax. Also, if the shareholder holds the shares for at least two years, they might be eligible for inheritance tax relief.
These tax incentives minimize the risk of investing in early-stage businesses, which is appealing to investors looking for higher returns.
Overall, the tax incentives related to SEIS/EIS can make it simpler for tech startups to attract investments and raise the funding they need to grow their companies.
2. Flexible use of funds
SEIS/EIS is a flexible financing route for technology companies as it doesn’t require them to use the money for specific purposes.
Startups can spend the resources as they see fit, whether it’s to create new products, recruit staff, or expand their business. This versatility contrasts funding options like bank loans or grants, which frequently come under strict conditions and specifications.
The flexibility of SEIS/EIS financing benefits tech startups that often require large financing to fund research and development of innovative goods or services.
Tech startups work in a dynamic and rapidly changing market where the requirements and demands of customers can change quickly. The flexibility of SEIS/EIS allows new businesses to adapt to these changes, whether it’s by shifting their business strategy or investing in emerging technologies.
The SEIS/EIS schemes also have lower investment demands, which implies that new businesses can attract smaller investors who may be inclined to take a chance on a new venture.
3. Investor support
Investors taking part in SEIS/EIS are frequently seasoned and well-connected people who can offer substantial support beyond money. This assistance can handle many different forms, including mentoring, guidance, and referrals to possible clients or business partners.
Tech businesses, which frequently need advice and support from people with experience in the industry, can benefit significantly from the experience and contacts of SEIS/EIS investors. For instance, investors may offer new companies guidance on product development, marketing tactics, or business development. They might also provide helpful contacts to new clients or business partners that could aid the startup in expanding its operations.
4. Credibility
Due to its speed and low administrative costs, SEIS/EIS funding is useful for digital businesses to raise capital. This contrasts with other funding options, such as venture capital, which may be time-consuming and expensive.
The SEIS/EIS procedure is intended to be simplified, with precise norms and rules that entrepreneurs and investors may adhere to. Compared to other investments, the paperwork and legal requirements related to SEIS/EIS investments are simple.
Additionally, private investors, rather than institutional ones, frequently make SEIS/EIS investments, which allows for a more straightforward and adaptable investing process. Without complicated legal documents, investors and entrepreneurs can negotiate the investment parameters, such as how much equity will be given up.
Hire Startup Accountant
Work with a London-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
5. Long-term investment
Investors in SEIS and EIS are frequently more patient and open to making long-term commitments. This can be especially helpful for tech startups since developing and launching new goods or services often takes time and money.
Compared to other types of businesses, tech startups require more significant investment in R&D, product testing, marketing, and client acquisition before they become profitable. Additionally, developing a customer base and a solid reputation in the market can take some time for a startup.
Investors in SEIS and EIS know tech firms’ characteristics and potential for long-term success. They are frequently more eager to make long-term commitments and continue supporting the firm as it expands and evolves.
For tech startups, this patient and encouraging approach can have several advantages.
Final thoughts
SEIS/EIS can be an exciting funding option for tech businesses
due to its unique advantages. The tax incentives and reduced investment criteria simplify recruiting a more extensive range of investors, while the government-backed schemes offer greater investor trust and flexibility.
Additionally, SEIS/EIS can assist tech firms in achieving crucial initial growth metrics like daily/monthly active users or retention rates, which are essential to creating a reliable and long-lasting company.
Overall, SEIS/EIS is a different and attractive alternative that can give tech entrepreneurs the time, resources, and support they want to flourish in a highly competitive field, even though other funding methods can also be worth considering.
