What to do with your savings? Bank interest rates are low, stock market prices are high and property prices seem crazy. And all of these alternatives have little positive impact on the planet or society.
At the same time, a lot of innovation to change business for the better is being led by smaller companies who are growing quickly. Some of these are reducing carbon emissions, others reducing waste and some are creating social value. What if you could own shares in them?
Historically, small business investment was only done by the rich, who could afford to buy large stakes in startups. But this has changed in recent years, with crowdfunding enabling small businesses to raise the investment they need from a larger number of smaller investors.
How does crowdfunding work?
You can invest directly in a company or via an organisation who offers many small companies to invest in and acts as an intermediary (like Crowdcube).
Either way, you will be able to learn about what the company does, how profitable it is, who is managing it and their plans for the future. And, of course, how they are making a difference to the environment and society. You will have the opportunity to ask questions directly to the managers.
Once you are happy that the company has good prospects, you decide how much you would like to invest and communicate that to the company or Crowdcube and they sort out the forms for you to sign, provide details to transfer funds, register your shareholding and provide you with a share certificate.
The UK government encourages private investment in small companies via the Enterprise Investment Scheme (EIS), which provides UK taxpayers with a tax reduction of 30% of the amount that they invest in eligible companies. You should make sure that the small businesses you invest in have EIS advance assurance from HMRC, which means that HMRC have reviewed the company and recognised that investors in it will be eligible for this tax benefit. Once you have invested, you will receive an EIS3 certificate that you can use to claim your tax benefit.
The conditions of the EIS include that you must hold your investment in the company for at least three years. Given the company will be in growth mode you will not receive a dividend during that period and possibly longer – your return will come when the company grows and takes on further investors or is sold. That is when early-stage investor shares are bought out at a premium to what those investors paid for them.
Is investing in small business risky?
Small businesses are more likely to fail than very large companies. On the other hand, the returns that they can provide can be much higher.
To manage the risks you should think carefully about which companies you invest in and consider a portfolio investment approach. This is where you spread your savings across different investment types and a number of small businesses so that the impact of the failure of one investment is more than compensated by the performance of your total portfolio.
Why we are explaining this?
At Rype, our work creating sustainable office furniture has led to a lot of people asking how they can support us – and at the same time we would love to have them on the journey with us as co-owners.
So now that we are looking for investment to accelerate our growth, we can offer shares to all of our supporters via crowdfunding.
This means that those who share our vision can co-own Rype and benefit from its future success and, all going well, grow their investment significantly.
You can learn more about our crowdfunding round here and register your interest (with no obligation). We will contact you with more information about the company to inform your investment decision.
Ask your financial advisor
A financial advisor can provide detailed and independent advice.