Getting access to funding is one of the biggest concerns for all businesses, regardless of size, turnover or length of operation. Having access to funds enables you to meet your overheads, deal with short term gaps in cashflow funding and supports your growth plans. It is paramount to success.
Since the credit crisis a decade ago, accessing the finance needed to start-up, trade through adversity or grow has been a challenge for many businesses. This is because banks – the traditional route to funding for many – have far more restrictions than they did ten years ago. They are more risk averse and require bigger guarantees than the average business can provide.
Plato’s contention that ‘necessity is the mother of invention’ rings true. Unsurprisingly, over the past ten years or so we have seen several alternative funding routes emerge. In fact, you could argue that there has been a paradigm shift in the way we view our corporate funding options.
Download our white paper on funding options for your business
Lost in the midst of crowdfunding et al is a lesser known form of funding that is becoming increasingly popular – pension-led funding.
- What is pension-led funding?
- How does pension-led funding work?
- The risks
- Tips for pension-led funding
- Get some advice
What is pension-led funding?
Although complex, pension-led funding is where a business borrows money from the personal pension of one of its directors and pays that loan back with interest.
Your pensions are principally your retirement nest egg; the money you have put aside to support you through your twilight years, once you have decided to pack in the day job once and for all.
What few people realise is that these pensions can also be used to inject much needed capital into your business. If you have a self-invested personal pension (Sipp) or a small self-administered scheme (SSAS), which is valued above £50,000, it can be used to invest for business purposes.
Less onerous than a crowdfunding campaign, and less pressure than an investor pitch to a group of Angel Investors or Venture Capitalists, investing your pension allows you to retain complete control of your business. All in all, a good idea, right?
Perhaps, perhaps not.
How pension-led funding works
Normally, you need to be 55 years of age or older before you can access your pension, but with pension-led funding, you can access it at any age. And, even better, all shareholders can also access theirs which means a company with multiple owners can really stockpile their options.
There are two options with pension-led funding.
- The first is a commercial loan from your pension. To do this you will need a SSAS because SIPPs aren’t allowed to invest this way. Your pension scheme loans your business the money it is looking for, up to a maximum of 50 per cent of the scheme’s value. The loan must be repaid at a commercial rate – at least 1 percentage point above the Bank of England’s base rate.
- Your other option is intellectual property sale and leaseback; for this option you can use both a SIPP or a SSAS. You can’t use your pension funds to buy your business’ physical assets, such as its premises or machinery, but intangible assets are acceptable investments. Therefore, the scheme is allowed to buy intellectual property such as patents, trademarks and copyrights which can then be leased back to the business at a commercial rate, which provides the business with funding upfront.
Once you have the finance you can choose to invest it in a number of ways; purchasing commercial property, through a loan to the company (which will be repaid with interest) or by buying shares.
Of course, unlike taking a loan from a bank, you are not under the same pressure to re-pay or to keep up with a repayment schedule – it is your money after all. Repaying the loan into your pension with interest also has the advantage of increasing your wealth, at the same time as funding your business needs.
The risks of pension-led funding
However, a word to the wise for those who think this is an ideal way to access ‘free money’.
The principle risk of pension-led funding is that if your business is unable to make the repayments it has promised to your pension fund, your retirement savings will suffer losses. You may not be able to make these up from other resources, which will make you worse off in retirement as a result. It is therefore imperative that you approach its investment in the same way that you would if you were to ask a third party to invest in your business; the same rules should apply.
Top tips for pension-led funding
- Determine the terms of investment
- Decide on a repayment term, if relevant
- Be realistic about interest repayments to make sure you are not out of pocket in the long term
- As with all investments – decide what a reasonable ROI looks like.
Investors look for businesses that are going to make their money work and return more to them than they invested in the first place. The higher the yield, the more attractive the proposition. And when deciding whether to invest your future livelihood, the same due diligence should be applied.
Get some advice
Because of the risks to your pension pot, seek advice before opting for pension-led funding – on whether it’s the right option for both you and your business.
Are you looking to raise finance for your business? Are you overwhelmed with the options or finding it difficult to get the terms you need? At Pegasus Corporate Finance, we work with businesses to access and package the most affordable and effective funding solutions for their needs.
If you would like to discuss how we could support you in reaching your goals, give us a call on 0203 3270567 or email [email protected]. Alternatively visit www.pegasusfunding.co.uk.