Entrepreneur ISA: should new businesses get a Government bonus?

There are calls for the Government to offer an Entrepreneur ISA to encourage more people to start businesses. One of the campaigners behind the idea tells loveMONEY how it might work.

Cash flow is one of the biggest issues facing small businesses and entrepreneurs need more help with their finances.

To do this, one idea has been brought to the Government with hopes of an announcement in the next Budget – an Entrepreneur ISA.

It would work in much the same way as the Help to Buy ISA helps aspiring homeowners, offering a Government bonus for saving towards your small business.

Ewan Edwards (pictured) is the head of savings at Aldermore Bank, the firm which is spearheading the campaign.

He tells loveMONEY more about how the Entrepreneur ISA might work.

Why do you want the Entrepreneur ISA to come to the market?

Small businesses are typically underserved by bigger banks. They would offer savings account offering low rates, playing on people’s inertia.

In business savings, inertia is caused by business current accounts. You traditionally go to big banks for that.

We’ve found a slightly irrational fear about not having savings with their bank, like they might somehow damage their credit record or damage their relationship with the bank.

Business savings as a concept is quite underdeveloped. You talk to SMEs about business savings and they don’t instantly get the idea. They think about current accounts or overdrafts.

When SMEs have excess cash, why do they leave it languishing at 0.5%? Some either make nothing and, in some cases, charge transaction fees too.

How would it work?

We were thinking that you’ll get a 25% Government bonus matching £50 - £200 in deposits a month.

With the Help to Buy ISA you make a contribution and then you get a 25% bonus from the Government to go towards your deposit. And we thought: "Wait a minute, maybe we could take the HTB ISA and apply it to start-up businesses," hence the phrase 'Entrepreneur ISA'.

It’ll be like a HTB ISA in that when the person buys the house, the bonus is activated. But in this case, when the business launches it’ll be activated. So, it could be nine months, one year, whenever.

It’s bound to go in your favour when you want to borrow some money from a corporation. Like you’re saying “Look, I’m serious about this”, with tangible evidence to support the bank loan. You can prove to them that you’ve been saving for three years.

It would be the Government’s product so ultimately, it would have to decide on the terms and conditions.

The Entrepreneur ISA should be cost-neutral. As part of that negotiation with the Government, we’ll have to accept that there will be some trade-off elsewhere.

Our second idea is the Small Business Savings Allowance. Again, why can’t the same principle of the Personal Savings Allowance apply to small business savings? It’ll help with their resilience and their lulls in trading cycles.

Overall, we thought the ISA would be aimed at budding entrepreneurs, while the savings allowance would be aimed at existing SMEs.

Is the Government on board?

We met with an MP and written to the small business minister and we’re meeting with his officials. It’s a slow burn but so far, so good.

The first thing we said is that you don’t have to borrow money. You might want to save up and do it that way. What we’re trying to do is say that there’s the option to do both.

It’s our role as a bank and as experts in the industry to talk and educate about the differences, encouraging small businesses to save.

When we did our research, the ISA got a lot of favour from existing entrepreneurs and would-be entrepreneurs. They want the simplicity, the tax-free, the Government bonus. Those things resonate well.

And the businesses we spoke to all said the same thing: “This would’ve been great if I’d had the opportunity”.

You can go on the website – we’ve got a change.org petition. The more people get behind it, the more powerful the lobbying will be.

What challenges do SMEs and entrepreneurs face?

We’ve highlighted a couple of ‘pain points’ for would-be and growing entrepreneurs.  

For the newer starters, it’s more of a struggle finding clients and marketing the business (21%), understanding tax requirements (10%) and invoicing (9%).

Meanwhile, for growing businesses it’s about generating sufficient cash flow (10%), dealing with unexpected costs (7%) and understanding tax requirements (6%).

A substantial 63% of people think the Government should provide more help to people who want to start their own business.

Let’s send a signal to Government that we’re really supporting SMEs. There are 5 million of them in the UK – they dominate the UK in terms of employment. The majority of start-ups are SMEs, the lifeblood of the economy.

What help is available for entrepreneurs now?

There’s a whole bunch of reliefs and grants out there – I’m no expert in all those things. Suffice it to say, you speak to SMEs and they’re quite bewildered by it all, they find it very complicated.

ISAs are well understood – they’re a known entity. They can get their head around the idea of an ISA, having it tax-free.

Aside from that, entrepreneurs should try and be more active with their bank accounts as it can be easy to be passive. Being online makes that active management much easier.

They should also put surplus cash in an account paying a higher return – it might only be for a month, but it’s still a month’s interest.

Other savings for start-ups and entrepreneurs

In the meantime, there are other spots to stash your savings. Here are a few sources that may be able to help you out. Be warned, some of them have rather high minimum deposits.

Savings account

Al Rayan Bank

The Al Rayan account has Bank 90 Day Notice Account has 1.50% AER and a £250 minimum deposit.

Redwood Bank

The RedwoodBank 95 Day Business Account has a return of 1.35% but a majorly hefty £10,000 deposit.

Moneycorp Bank

The Moneycorp Bank 90 Day Notice Account Issue 1 gives you a lower 1.31% return and also has the chunky £10,000 deposit.

Current account

RBS Current Account standard tariff

The RBS account comes with a start-up incentive and two years of fee-free banking if you’ve been trading for less than one year with a turnover of under £1 million.

There is a £5 a month account fee but this will be waived if your transaction charges go over £5.

Santander Business Current Account

The Santander account also has a start-up incentive with 12 months’ fee-free banking if your business is up to 12 months old.

You can choose a fixed fee tariff for your business, ranging from £7.50 to £40 a month:

You can also apply for a business overdraft from £500 to £25,000 (subject to acceptance). Just watch out for the £7.50 a month account fee.

Clydesdale Business Current Account – business tariff

Unlike the others, the Clydesdale account has a start-up incentive and a switching incentive.

The offer applies to new small business banking customers with a turnover of less than £2 million switching their main business current account or start-ups opening their first account within 12 months of beginning trading.

The Government website has plenty of advice for people who are setting up or running their own businesses. To find out more about Aldermore’s campaign, head over to the Support More Entrepreneurs website.

Alternatively, you can compare personal savings and ISAs with loveMONEY