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Dinesh kumar
The problem is particularly severe for companies that want to raise seed corn
finance to build up their business from a very small beginning. Venture capitalists
are often reluctant to spend time and resources in looking at small ventures
where the potential returns are likely to be small. They are much more likely to
be interested in financing well-established medium-sized private companies,
such as private companies that gain independence in a management buyout.
Medium-sized businesses often need new equity to enable them to build their
business to a point where a stock market flotation is possible, and the risk of
business failure is lower than with smaller start-up ventures.
In the UK, for example, most of the larger venture capital organisations are not
prepared to consider providing finance for start-up companies or newlyestablished small companies, and focus instead on more well-established
companies such as management buyout companies.
On the other hand there are some very large financial institutions that provide
venture capital to companies on a global scale, including the provision of capital
to companies in China and India. For example in April 2008 US-based private
equity group Warburg Pincus announced the creation of a $15 billion global fund
for investing mainly in venture capital investments and growth capital for
private companies. The company announced at the time that it was looking at a
five-year to seven-year time frame for its investments.
Government aid
Many governments are aware of the importance for the national economy of
SMEs and want to encourage SMEs to develop and grow. Some governments
offer specific schemes to assist SMEs and give them access to finance either
through direct financial assistance or by means of tax incentives to investors.
The following are some of the schemes offered by the UK government.
Loan guarantee scheme
This was introduced in 1981 to help SMEs get bank loans even if they have
insufficient security for a loan in normal commercial circumstances. The
government encourages banks to lend to SMEs by guaranteeing 75% of each
loan up to 100,000 for new companies and 250,000 for existing companies
with the loan being guaranteed for two to ten years. In return the company pays
an additional rate of interest to the government. The loan guarantee has assisted
some small companies but has not been used extensively.
Enterprise Investment Scheme (EIS)
This was introduced in 1994 to encourage equity investment in small unquoted
companies. It offers income tax relief at 20% on annual investments of up to
150,000 made by individuals who are not connected to the company. Capital
gains made on the sale are exempt provided the shares have been held for a
minimum qualifying period. The scheme therefore gives wealthy individuals a tax
incentive to invest directly in unquoted companies.
Venture capital trusts
Venture capital trusts are investment trusts, approved by the tax authorities,
which are established to invest in small companies. Investors put their money
into a venture capital trust rather than directly into small companies, and the
venture capital trust makes investments in a number of small companies. In this
way investors in venture capital trusts obtain an indirect investment in a portfolio
of small companies, and receive tax relief on their investment. They are exempt
from income tax on their dividends and are also exempt from capital gains tax on
disposal of the shares, provided they have been held for a minimum qualifying
period.
Enterprise grants
The government or government agencies might award cash grants to small
companies. For example in the UK an enterprise grant scheme allows SMEs to
apply for a grant of 15% of their fixed costs up to a maximum of 75,000 when
they are investing up to 500,000.
Finance for SMEs: summary
The success of government initiatives to assist SMEs to obtain capital to grow
their business is limited. Most SMEs face serious problems with raising long-term
capital, and the supply of long-term funding for small companies falls well short
of the demand from SMEs for capital.