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Self-Funding of SMEs “Worrying”

/ 24 June 2014

Self-funding is the most popular form of funding among small businesses, according to a survey by Bibby Financial Services.

Almost half the 1,000 firms surveyed are either using their own money or seeking help from friends or family, up from 26% six months ago.

David Postings, chief executive of Bibby’s, described the findings as “worrying”, adding that: “These casual arrangements bring with them inherent problems. Aside from the risks of linking business and personal interests too closely, self-funding is unsustainable over time.”

Source: The Daily Telegraph

We Say: We’re not sure we agree that self-funding is inherently a bad thing. After all, if you are funding your own business you don’t have to renegotiate the facility every year; you don’t run the risk of having the funder withdraw funding leaving you high and dry; you are guaranteed that there is no conflict between the interests of yourself and your funder; you can guarantee that your funder understands your business and has experience of it; you can be pretty sure your funder won’t insist on flogging you dodgy financial products which neither you nor he completely understands… Do we need to go on?

Of course, one big problem of self-funding is that it has to come out of after-tax income. Income that has suffered tax at 21% at the very least in the case of a small company; and at 47% (including NIC) for a sole trader or partnership. Here’s a simple idea to encourage reinvestment: why not change the tax rules so that all reinvestment into the business is made out of pre-tax profits? In other words, charge tax not on the profits that a business makes but on what the owner takes out of it? We’ve said for years that it’s simply bizarre that the same tax is payable by an employee who earns £50,000 which he is free to spend in whatever way he pleases as by a self-employed trader whose accounts show a £50,000 profit but whose cash-flow has allowed him to draw only £20,000.

For more information, please contact London Accountants Berg Kaprow Lewis.