Personal pension funds can unlock finance
“Most business owners don’t realise that they might be able to use their own pension funds to unlock the capital that they need to take a thriving company to its next stage of growth.”
Whether you are looking for funding to develop new products, step up your marketing, or to invest in stock, staff or premises, pension-led finance can be a great source of capital in a climate where high-street lenders are still reluctant to lend to SME’s.
How pension backed funding works
If you, and/or any co-owners of your company hold private pension funds then you might have the collateral to help your business grow without turning to other forms of lending. To be eligible, your pension must be transferred to either a SIPP (self-invested personal pension) or SSAS (small self administered scheme), and each type of pension is bound by different rules when it comes to pension backed funding.
In simple terms, the pension fund loans capital to the business, which is then repaid over no more than five years with interest applied – usually at the same rates as a commercial loan. If your business holds intellectual property, such as copyright, logos or patents, this presents another route to funding, as the pension fund could buy intellectual property, as an asset, and then lease it back to the business. With this solution, you are using your own business resources, i.e., intellectual property, to raise the capital you need to expand, and the added bonus is that as the value of the IP rises your pension fund benefits by acquiring an appreciating asset. When you, or the other business owners are ready to retire you could sell the IP back to your company, or even continue leasing it, in order to generate a constant stream of income.
Who can benefit from pension backed funding?
Pension-led funding is not suitable for every business – if you are looking for finance because your trading has hit a lull or you need to turn things around, this is probably not the right finance solution for you. Pension-led funding is appropriate for ambitious companies with healthy balance sheets and a well-structured expansion plan, otherwise the finance is simply too much of a risk. But if you know your business has the potential to succeed through expansion, and you can back this belief up with facts, figures and a solid business plan, pension backed funding could be the ideal alternative to conventional sources of finance.
The red tape surrounding pension backed funding
Pension backed funding is a complex business, which calls for experienced, professional advice to ensure that you are getting the maximum financial benefit and that you are not being reckless with your pension pot. To benefit from a SSAS pension loan, your pension pot usually has to total at least £50,000 and your company must be limited. The loan to the business cannot exceed 50% of the pension pot and it must be a repaid with a rate of interest of at least 1% above the Bank of England base rate. You should be aware that your pension pot is at risk with this type of funding if the company fails to make repayments or goes bankrupt.
Pension backed funding can be an innovative way of releasing capital to help a successful, robust business execute its expansion plans, and it can create additional benefits for business owners by generating extra income into the pension pot through interest payments or the appreciation of an asset such as intellectual property.