David Prosser: If crowd-funding platforms get ISA status the banks may finally have to take notice on lending
Crowd-funding platforms that raise money for small businesses could get a massive shot in the arm in April under plans by the Treasury to enable them to offer greater tax efficiency.
Representatives of the crowd-funding industry have begun talks over enabling savers to hold investments made through the platforms within tax-free individual savings accounts. If agreement can be reached ahead of the Budget in March, crowd-funding investments could become permissible ISA holdings from the beginning of the 2014-15 tax year.
The concession represents a huge opportunity for the crowd-funding industry, which thinks ISA status would massively increase demand from investors. The benefit would partly come from the increased returns savers would be able to earn from such platforms – income and gains are currently taxable – but also because it would effectively represent an official seal of approval for what remains a relative innovation in financial services.
From the Treasury's perspective, extending ISA status to crowd-funding sites would be another plank in its strategy to boost the availability of funding to small businesses that continue to find it difficult to raise finance from the banking system. It would also send a clear signal to the banks that ministers' frustration is mounting.
That concern will have been amplified by yesterday's figures from the Bank of England, which revealed a larger-than-expected fall in bank lending to small businesses during December. Ministers have also been stung by criticism from the Public Accounts Committee, which warned that government efforts to boost small business funding have been frustrated by a lack of departmental co-ordination.
Nevertheless, some important barriers remain to giving crowd-funding sites ISA status. Not least, the Financial Conduct Authority is still working on the final detail of how it intends to regulate the sector, amid concerns some savers and investors do not understand how the platforms work.
It is also unclear whether all crowd-funding platforms would be eligible for ISAs. Another issue is the lack of liquidity on some crowd-funding platforms. Savers on loan and equity platforms can find it difficult to cash in their investments if they need access to their money.
Still, these barriers are relatively easy to overcome and the relaxation of the ISA rules to allow savers to hold shares in Alternative Investment Market-listed companies in the shelters provides a template to follow.
One final thought. Giving crowd-funding platforms access to millions of ISA investors would further burnish their credentials as genuine competitors to the banks. Expect to see some evidence of "if you can't beat them, join them". Rumours of a collaboration between market leader Funding Circle and Santander persist. Other deals are likely.
Are SMEs hiding their light under a bushel?
"Advertising Pays 2" is the title of a somewhat self-interested report from the Advertising Association, published yesterday, which claims that less than a third of small businesses have invested in advertising: while the SME sector accounts for 40 per cent of the UK's economic output, it is responsible for just 18 per cent of ad spending.
While the association's report is clearly intended to drum up business for its members, it does include data, compiled by the accountants Deloitte, which suggests smaller companies get more bang for their buck from advertising – realising eight times as much benefit for every £1 spent as larger businesses enjoy. Two-thirds of micro-businesses that have advertised have seen a direct increase in sales, Deloitte adds.
"More still needs to be done to ensure these businesses are taking advantage of the opportunities that advertising can offer, said Sam Blackie, a director at Deloitte. "An increase in investment in advertising will lead to SMEs and their exports growing, helping to further sustain the UK economy."
Small firms wary of growth via bank loans
How enthusiastic are small businesses about the prospects for economic growth? New research from KPMG suggests that despite the latest encouraging data on the UK's economic recovery, small businesses remain cautious – the accountancy firm says just 21 per cent plan to look for external finance this year as part of a growth strategy.
Instead, almost half of small businesses plan to use their own cash to finance this year's growth, or don't intend to increase funding geared towards growth at all. Nevertheless, three-quarters of small businesses feel more confident about the outlook for 2014 than the year just gone, KPMG added.
Iain Moffatt, the head of regions at KPMG, said the wariness reflected the ongoing nervousness of small businesses about dealing with the banks. "Nearly half of businesses are not willing to take on any risk associated with external finance and leverage their business, despite the reported optimism levels," he said. "This is an indication that companies are still very uncertain about the banking market, which some view as being unsupportive to small businesses during the recession."
Small business person of the week
Julia Groves; Founder, Trillion Fund
"My background is in dotcoms rather than finance. I'm really interested in the way the internet can shift the balance of power between institutions and individuals.
"I've been involved with building businesses in the renewable energy sector. The solar industry was hugely popular with large investors until three years ago, when the Government reduced the subsidies available; suddenly, the money disappeared, even though there were still reliable returns of around 9 per cent a year.
"Renewable energy projects worth less than £20m or so simply couldn't find funding. At the same time, there are millions of people out there who have savings they need to invest, but who aren't getting any help doing so.
"That's where Trillion Fund comes in. We're an online platform that aims to match up those two groups, using the power of a crowd of individuals looking for a return on their money to fund projects that would otherwise fail to attract funding.
"We launched almost two years ago. Our business model is about making a profit – we take a fee from projects we help to fund – and helping investors to make money too. I've got the grey hairs to prove that the only way to do that is as something that's commercially viable and economically profitable."
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