Going it alone? Some Financial Planning tips for those setting up a new business

The Government believes that small businesses have a big part to play in setting the UK on the path to long term, sustainable economic growth. To this end, one of its stated aims in the March 2012 Budget was to make the UK the ‘best place in Europe to start, finance and grow a business. But what are the issues facing anyone who fancies going it alone and setting up a new business? As it’s Financial Planning Week, it’s a great time to highlight some of the main financial planning considerations if you’re doing just that.

One of the major stumbling blocks to any small business or anyone wishing to start a new business has been access to affordable finance. With the banks having taken such a hammering over the course of the financial crisis, many have retreated and have become either reluctant, unable, or unwilling, to lend to new businesses who they deem to represent an unacceptable risk of failure. The Government therefore decided to step in and address the issue by introducing a number of credit easing programmes such as the Funding for Lending Scheme (FLS). This scheme allows banks and building societies that increase lending to UK households and businesses to borrow more in the FLS, and do so at lower cost than those that scale back lending.

But the major test for these schemes is whether this funding actually reaches small, fast growing and start up businesses. Evidence shows that 4 out of 10 small businesses were refused lending in the 2nd quarter of 2012.

With the traditional domains of lending being closed off, many small businesses have sought alternative sources of finance raising.

One of these is another new Government initiative, The Seed Enterprise Investment Scheme (SEIS). This is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies.

There are strict criteria for companies who wish to receive SEIS investment to adhere to. The two most important are :
• any company wishing to receive investment under the scheme must have no more than £200,000 in gross assets
• any company is restricted to receiving £150,000 in total under the scheme

There are further restrictions as the Government wishes to ensure that investment under the scheme only reaches small, early stage companies who would otherwise find fund raising difficult. To compensate the investor for the additional risk they are taking by investing in start up companies, generous tax reliefs are available, such as 50% income tax relief and Capital Gains Tax reinvestment relief which allows up to £100,000 of capital gains from other assets to be exempt from CGT if reinvested in SEIS qualifying shares. So, both investors and businesses benefit.

If you are moving from employed to self employed, your employer will have probably laid on a range of employee benefits, such as life insurance and private medical insurance. Anyone who is self employed will now need to work out what benefits are really important to them. For example, income protection which provides you with a monthly income if you are unable to work may now be a priority. If you are setting up a business with one or more partners, you should also consider partnership protection which protects each partners interest in the business in the event of the death of one of the partners.

You’ll need to sit down and priortise which benefits are most important to you, your family and the business. Make sure you read the small print on policies and be clear about what is and is not covered. Be sure also to shop around as premium levels vary. This is where a financial planner can help.

Again, if you were previously employed, no doubt your employer provided both access to a pension scheme and made contributions to a pension on your behalf. Being self employed you will no longer benefit from these additional contributions which may affect your retirement plans. You may be temped to stop or reduce pension contributions whilst the business is taking off, but doing so could seriously affect the pension pot you can expect when you come to retire.

You’ll also need to remember that the self employed pay Class 2 National Insurance Contributions (NICs) and possibly Class 4 also. Payment of these will mean that you continue to be entitled to most of the State benefits that employed people enjoy i.e. the Basic State Pension and bereavement benefits. However, you will no longer be entitled to the State Second Pension (S2P), which acts as a top up to the basic state pension as only Class 1 NIC contributions qualify for S2P.

It’s worth undertaking a cashflow planning exercise for both your business and family needs. This will help identify where shortfalls may exist over the coming years and help you plan accordingly. It’s also a good idea to find out more about the various ways you could obtain funding for the business to understand what is available, whether you qualify and how much you could receive. Remember, 50% of new businesses fail to make it past their third year of trading and the main reason for this is poor planning.
Going it alone doesn’t have to mean you do everything in isolation. Taking independent advice from professionals who have helped thousands of people start up and run small businesses should help with your business and personal plans and set you down the road towards building your own empire.
Mark Brownridge CFP
Mazars Financial Planning