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Entrepreneur ISA: should new businesses get a Government bonus?

There are calls for the Government to offer an Entrepreneur ISA to encourage more people to start businesses. One of the campaigners behind the idea tells loveMONEY how it might work.

Cash flow is one of the biggest issues facing small businesses and entrepreneurs need more help with their finances. To do this, one idea has been brought to the Government with hopes of an announcement in the next Budget – an Entrepreneur ISA.

It would work in much the same way as the Help to Buy ISA helps aspiring homeowners, offering a Government bonus for saving towards your small business.

Ewan Edwards (pictured) is the head of savings at Aldermore Bank, the firm which is spearheading the campaign.

He tells loveMONEY more about how the Entrepreneur ISA might work.

Why do you want the Entrepreneur ISA to come to the market?

Small businesses are typically underserved by bigger banks. They would offer savings account offering low rates, playing on people’s inertia.

In business savings, inertia is caused by business current accounts. You traditionally go to big banks for that.

We’ve found a slightly irrational fear about not having savings with their bank, like they might somehow damage their credit record or damage their relationship with the bank.

Business savings as a concept is quite underdeveloped. You talk to SMEs about business savings and they don’t instantly get the idea. They think about current accounts or overdrafts.

When SMEs have excess cash, why do they leave it languishing at 0.5%? Some either make nothing and, in some cases, charge transaction fees too.

How would it work?

We were thinking that you’ll get a 25% Government bonus matching £50 – £200 in deposits a month.

With the Help to Buy ISA you make a contribution and then you get a 25% bonus from the Government to go towards your deposit. And we thought: “Wait a minute, maybe we could take the HTB ISA and apply it to start-up businesses,” hence the phrase ‘Entrepreneur ISA’.

It’ll be like a HTB ISA in that when the person buys the house, the bonus is activated. But in this case, when the business launches it’ll be activated. So, it could be nine months, one year, whenever.

It’s bound to go in your favour when you want to borrow some money from a corporation. Like you’re saying “Look, I’m serious about this”, with tangible evidence to support the bank loan. You can prove to them that you’ve been saving for three years.

It would be the Government’s product so ultimately, it would have to decide on the terms and conditions.

The Entrepreneur ISA should be cost-neutral. As part of that negotiation with the Government, we’ll have to accept that there will be some trade-off elsewhere.

Our second idea is the Small Business Savings Allowance. Again, why can’t the same principle of the Personal Savings Allowance apply to small business savings? It’ll help with their resilience and their lulls in trading cycles.

Overall, we thought the ISA would be aimed at budding entrepreneurs, while the savings allowance would be aimed at existing SMEs.

Is the Government on board?

We met with an MP and written to the small business minister and we’re meeting with his officials. It’s a slow burn but so far, so good.

The first thing we said is that you don’t have to borrow money. You might want to save up and do it that way. What we’re trying to do is say that there’s the option to do both.

It’s our role as a bank and as experts in the industry to talk and educate about the differences, encouraging small businesses to save.

When we did our research, the ISA got a lot of favour from existing entrepreneurs and would-be entrepreneurs. They want the simplicity, the tax-free, the Government bonus. Those things resonate well.

And the businesses we spoke to all said the same thing: “This would’ve been great if I’d had the opportunity”.

You can go on the website – we’ve got a petition. The more people get behind it, the more powerful the lobbying will be.

What challenges do SMEs and entrepreneurs face?

We’ve highlighted a couple of ‘pain points’ for would-be and growing entrepreneurs.

For the newer starters, it’s more of a struggle finding clients and marketing the business (21%), understanding tax requirements (10%) and invoicing (9%).

Meanwhile, for growing businesses it’s about generating sufficient cash flow (10%), dealing with unexpected costs (7%) and understanding tax requirements (6%).

A substantial 63% of people think the Government should provide more help to people who want to start their own business.

Let’s send a signal to Government that we’re really supporting SMEs. There are 5 million of them in the UK – they dominate the UK in terms of employment. The majority of start-ups are SMEs, the lifeblood of the economy.

What help is available for entrepreneurs now?

There’s a whole bunch of reliefs and grants out there – I’m no expert in all those things. Suffice it to say, you speak to SMEs and they’re quite bewildered by it all, they find it very complicated.

ISAs are well understood – they’re a known entity. They can get their head around the idea of an ISA, having it tax-free.

Aside from that, entrepreneurs should try and be more active with their bank accounts as it can be easy to be passive. Being online makes that active management much easier.

They should also put surplus cash in an account paying a higher return – it might only be for a month, but it’s still a month’s interest.

Source: Love Money

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Applying for finance: The five common mistakes made by startups

When you decide to apply for a loan to kick-start your firm’s growth, it’s a daunting task as much as it is an exciting one.

Essentially, you’re putting your business out there and opening it up to potential scrutiny. This means you have to find a balance between making your business an attractive proposition, while remaining realistic about your financial achievements to date and what the short-term future has in store.

In all the excitement, mistakes are common. Here are five mistakes and some sensible solutions to get you off on the right foot.

Not having an up-to-scratch business plan

Any bank, lender, or other funding source will want to know why you want the money, what you’re going to use it for, and, ultimately, why it’s worthwhile them lending to you (that is, how you’re going to make them more money in the long-run).

If your business plan is just pie in the sky or hasn’t been put together well enough, then either no one will want to lend you any money, or the money you are lent will be given to you at a really poor rate.

Being able to quantify your projected growth through sturdy financials is a must, and should be at the heart of your business plan.

Trying to go it alone

When you’re the proud owner of a startup or scaleup, it may be tempting to take on as much as possible, and keep everything in-house in order to protect “your baby”.

But enlisting a professional to assist with your business plan, until you’re good enough to do it yourself, is a very sound investment.

There are many startups and scaleups whose owners lack the specific accountancy experience required, and there is absolutely no shame in asking a professional help to ensure you have a proper business plan.

As hinted above, lenders will eat you alive if you can’t back up your finance application with a sturdy business plan. You need to wow potential investors and funders with your strategy if they are to give you any money, so it’s worth committing time and resource to it.

Taking the first offer on the table

It’s understandable that, in their hunger to secure an offer, startups are often guilty of taking the first one on the table – often out of fear that they won’t get anther one. But this is a huge mistake.

Even in the haste of it all, it’s essential to “shop around” and ensure you have a number of offers to choose from. Each offer will naturally have their pros and cons.

When we were scaling our business, we weighed up no less than 10 offers before picking one. The one we chose allowed us to run the business exactly in the way we wanted, and gave us longevity.

The others ticked some big boxes at the time (and would have been easy to accept if we hadn’t been patient), but in the end they weren’t right for us.

Have confidence in your business, sell the dream in the right way, and offers will come. Once they do, be sure to capitalise without jumping in too quickly.

Not being clear on what the money is for

I touched on this earlier, but it’s worth exploring in more detail. What do you actually want the money for? Are you expanding your premises nationally, or maybe internationally?

Perhaps you are on a recruitment drive, or developing a new product in-house.

Whatever your needs, be sure to explain these clearly in your loan application to avoid the common mistake of “money for money’s sake”.

Why borrow £5m now if you actually only need £1m to meet your immediate objectives?

Many startups make the mistake of asking for more than they need, despite it being universally known that banks use a variety of formulas to work out how much they think you can afford to borrow.

One way of helping a potential lender understand your business needs is to develop a relationship with them before you actually need finance. That way, they’re already on board with your vision, and the conversation further down the line will naturally be a much easier one.

Immediate priorities aside, it’s also a good idea to build a contingency into the amount of working capital you budget for when applying for a loan – there are always things that come up, which even the sturdiest business plan cannot anticipate.

Assuming banks are the only funding source

Some entrepreneurs assume that the only feasible option is to apply for a bank loan, largely because they’re the most conventional and widely advertised. But this isn’t the case. In fact, it’s far from it.

There are many funding solutions offered in the alternative lending marketplace – an area that has experienced significant growth of late and become increasingly popular with the startup community.

The majority of alternative finance lenders are fine with borrowers who have impaired or bad credit, or have a limited business history, making them well suited for young businesses.

Again, there is a wider point here around doing your research to find the best deal. Don’t simply go down the mainstream route because it’s the most accessible.

Source: City A.M.

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The UK has the highest number of new business developments in a developed country despite Brexit

  • There were 218,000 new businesses in the UK last year, a 6% rise year-on-year. 
  • Other developed countries saw an average of just a 2% rise. 
  • Crowdfunding and peer-to-peer lending has been credited with this sharp rise in start-ups.

The UK outranked all other major developed economies in terms of the number of businesses established last year, according to figures from accounting group UHY Hacker Young.

It became home to 218,000 more businesses in 2016, a rise of 6% over year-on-year. Meanwhile, other major developed economies including France, Germany, Italy, Japan and the US saw an average 2% rise in number of businesses over the year.

The UK ranked sixth of the 21 countries studied by UHY, behind China, Pakistan, Vietnam, Malta and India. Across all the 21 countries, there was a 7.7% rise in established businesses.

“Enterprise and entrepreneurship in the UK have been gathering pace at impressive speed,” said UHY’s Daniel Hutson.

“As a range of new sources of funding gain traction in the market and the corporation tax burden lightens, the start-up climate is improving, financial pressures are easing and investment for growth is on the cards.”

UHY credited alternative funding sources, such as crowdfunding and peer-to-peer (P2P) lending, with helping to boost the entrepreneurial environment. The Conservative plan to lower corporation tax to 17 per cent by 2020 may also be helping to attract firms to the UK.

“The figures suggest confidence in the economic outlook, despite Brexit. Whether this is sustainable, given the uncertainties that still surround the ongoing negotiations with the EU, will be something the government will want to watch,” said Hutson.

While the UK had a total of 3.9 million businesses within its borders as of the end of 2016, China — which saw a massive increase of 19% — had 26.1 million.

The US fell in 13th place, with the number of businesses increasing by 2.1% over the year to 11m.

Source: Business Insider