Since banks have cut down on their lending, it’s no secret that SMEs and start-up businesses have been forced to look at alternative finance options to grow their business. Peer-to-peer lending such as crowdfunding has gone from strength to strength on the back of this, growing over 100 percent each year for the past three years. However, it is not the only form of alternative finance out there, and other methods have arguably been overlooked in the past. One of these is Pension-Led Funding – using a pension pot to generate a loan for your business.
Essentially, it’s all about making your pension work harder; it allows business owners to borrow funds from an existing pension and invest them in their company. Business owners will first need to move their retirement funds into a self-invested pension (Sipp) or a small self-administered scheme (Ssas). These are the most flexible types of personal pension which can fund either a commercial loan from the pension scheme to the business, or the purchase of intellectual property.
The difficulty in getting a traditional loan or investment is convincing the bank that your business is worth taking a chance on. However, with pension-led funding, you take on the risk yourself by loaning your pension fund to use as capital.
Furthermore, unlike taking a loan from a bank, there’s no risk of losing your home or being hit with charges should you default. The flexibility and independence is what makes pension-led funding such a viable option for many small businesses.
However, there are some downsides. It is recommended that there be around £50,000 in the pension pot for this form of funding to even be worth considering. Clifton Asset Management advises that the maximum loan from a SIPP should not exceed 60 per cent of the total pension pot, and regulation dictates that for an SSAS loan, it should not exceed 50 per cent.
Pension-led funding will not necessarily be the quickest way to access funds; the process usually takes between six and twelve weeks. And of course, the biggest thing to remember is that should the business fail and the loan be unable to be repaid, you risk losing a significant chunk of your pension.
Rapid Retail, a company who hire portable retail units for shows, exhibitions and matches, chose pension-led funding to expand their business. Founder Nick Daffern wanted to grow the business, but believed getting a loan from the bank would be a waste of time. He said:
“Times have changed and it’s all about finding appropriate tools for the type of finance you need. We knew about the alternative funding sector and had even used it before we were contacted by Clifton Asset Management. They talked to us about pension-led funding and we thought it was an absolute win-win because we could invest in our business while gaining tax effective pension growth – the perfect solution.”
Nick and co-founder Andy Moss transferred their £130,000 pension pot into an SSAS. Taking £100,000 from their pension scheme, they invested the money directly into expanding the business – and they’re very happy with the decision.
“We’ve set our pension repayments at around 7%; a far better return than we’d seen from our regular pension providers and it’s
highly tax-efficient for Rapid Retail.”
Charlotte Dean worked as a personal trainer and Pilates instructor for 19 years, before setting up Careers in Fitness, which provides training and qualifications within the sector.
“I chose pension-led funding instead of a bank loan because it allowed me to invest my own money into a business I totally believed in.
“By monetising the Intellectual Property value held within Careers in Fitness Global, I was able to utilise an asset class that many businesses would not recognise. It was also reassuring that IP has been widely recognised as an appropriate pension investment by HMRC for almost 10 years.”
When looking at finance options for your business, pension-led funding may not be the first route that springs to mind. However, if the idea of putting your own money into your business without reliance on banks or other investors, it’s well worth considering.
For more information on how to get started with pension-led funding, pensionledfunding.com
Miranda Wadham on 27/08/2015