Small companies have great potential:
When the world’s bourses are collapsing, as happened in the last recession, the valuations of unquoted companies can hold up well against general trends
And when the economy bounces back from recession, small companies can be the quickest to react, expanding rapidly, and seizing market share
Investing early can give spectacular returns because small companies can quickly multiply in size.
But small companies can be vulnerable to economic changes too, and, without sales, reserves can quickly run dry of working capital. And this is why the government encourages private investors to get involved: private investors provide the capital the banks cannot or will not provide, and the government tax breaks lower his risk.
The tax credit means, in real terms, that the shares are bought at a discount. Gains are often tax free. (VCTs can even pay dividends free of tax too.) Losses can sometimes be offset against an individual’s future tax bill (as with EIS). Inheritance Tax (IHT) can sometimes be avoided by investment in these type of offers.
Are all small companies high risk? Relatively speaking, they can be no riskier than other securiites, and, some, argue, that the tax breaks make them lower risk than many other alternatives. Some financiers use tax-efficient investments to fund trades with income streams predictable and relatively secure. Of these types of trades, solar energy (the installation of solar panels on roof tops or in fields, connected to the National Grid) is a good example of a business where risk can be relatively contained. Some buy property based trades, like pubs, which are established and trading with small margins. All bought with a 30% tax credit, it’s important to keep in mind.