Finance for high growth firms: EIS and beyond
Authors: Dr Neil Lee
26 September 2011
Brussels has given the Treasury the go-ahead to expand the Enterprise Investment Scheme (EIS). By reducing the tax investors pay when backing high-risk companies, it’s designed to increase investment in them. The government argues the scheme will create more high growth firms: the seven per cent of firms who create half of all new jobs. It’s a big win for NESTA (sponsors of our Big Innovation Centre) who have been highlighting the importance of these firms for some time.
At The Work Foundation, we’re also quite pleased - EIS is a good policy. Research for our Cities 2020 programme highlighted the problem of obtaining finance and cash-flow when firms are expanding. 27 per cent of firms experiencing sustained growth see finance as a significant obstacle to their success; only 21 per cent of other firms do. In the aftermath of a major financial crisis, the problem of lending to high growth firms is a major drag on the economy.
Unlike past attempts to stimulate SMEs, the policy is well targeted. Yet as a policy agenda for high growth firms, we don’t think it goes far enough. We think there needs to be a greater focus on potential high growth firms, not just those which are actually achieving rapid growth – and so presumably are doing okay. Since it can help them find the investment they need to start growing, EIS can help address one of the major problems for potential rapid growers; but there are a number of other obstacles holding them back. We’ve highlighted management skills as a particular problem.
But we still don’t know exactly what obstacles high growth, and potential high growth, firms face. We’re doing some more work for NESTA looking at this and will be reporting soon. EIS is good, but its only a start. Our evidence should help policymakers target the other problems high growth firms face.
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