I want to give some thought to the
proposal that the government should offer tax incentives to private
lenders who invest in small businesses.

Why? Because despite huge
resources, rhetoric and taxpayer funding, the banks could still do
more to lend to small businesses.

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Meanwhile, there are large numbers
of high net worth individuals with cash to spare, but who often
baulk at the prospect of lending because there is a risk that loans
will go sour.

For equity investors buying shares
in start-up companies, it is a different story. The government
offers big tax credits in the form of the Enterprise Investment
Scheme (EIS), meaning they get tax relief on the investment and pay
no capital gains tax if they hold the investment.

It stands to reason that there
should be similar tax incentives for private lenders. Should the
government mobilise private funds to lend to small businesses, it
could afford to put less energy into begging the banks to lend
taxpayers’ money.

Private lenders I have spoken to
have often indicated that they would get involved in commercial
lending if there was a tax incentive to do so. It would cost the
Treasury little – perhaps a 10% relief that would revert the new
50% tax band back to 40%.

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There is a ready-made structure in
place with the existing EIS rules, which specify which kind of
companies qualify for tax relief. This would iron out an obvious
problem, namely that loans could be artificially botched to exploit
a tax advantage.

If the government is committed to helping small businesses, it
should look at offering tax incentives to private lenders as a
creative way to allow the economy to grow.

William Flatau, founder of First
Funding