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Bank said ‘no’ to loan, why not dip into your pension pot?

man_pension_led_fundingWe’re all familiar with alternative sources of business funding -  crowdfunding, angel investors and so on but have you considered pension-led funding? One of my SME clients has been needing some financing recently in order to allow them to invest and grow the business.

Their problem was that their balance sheet was not particularly strong, in fact, decidedly weak after a number of years of operating losses and propped up by directors loans. The best finance offer that they were able to secure via a number of business finance brokers at comparatively short notice, was an APR of 45% and loan repayable over 14 months. As you can imagine we looked into other options!

Pension-led funding

One funding alternative we pursued was pension-led funding, using the owner’s pension pot to invest back in the business. We transferred his existing pension, which had been generated from a previous corporate career, into a new company pension scheme, a Small Self-Administered Scheme (SSAS) of which he was the beneficiary.  We negotiated with a new company scheme to loan the company a similar amount but with an interest rate of 8-10% per annum and repayments spread over 5 years. Much better loan terms. This has given my client room to breathe again, to restructure his business and invest for the future.

My client said “The SSAS loan was the perfect solution to my need to inject cash into my business so we can grow.  A far better deal than a loan through third-party lenders, both in terms of a longer repayment period and a more competitive interest rate”.

Pension-led funding is a complex strategy and subject to regulated advice from specialist pension advisors. They can help develop this funding technique.

Even though it is “friendly” finance, the pension fund has to be protected by taking “independent” advice on the return on the loan, and for that, it is essential that the business has all its records and plans documented, including regular monthly management accounts, 3-5 year business plans, budgets and forecasts, etc., all of which could be developed by a Finance Head.

This doesn’t just to apply to companies with weaker balance sheets, but can apply to any company where the conditions around the offer of a business loan are deemed unacceptable by the owner.  That may include personal guarantees from the directors or even security on a property, and this is another example of the sort of finance that may be available.

The benefit is that this is a low-risk borrowing, effectively “friendly” borrowing – it’s not like a horrible bank who will bring down the whole loan at the first sign of a default. This is another asset owned or controlled by the owner so why not utilise all their assets in the best possible manner?

Add value through intellectual property

The SSAS loan can also purchase the intellectual property of the company to bring forward another cash injection – and again future gains in the value of the company’s IP can accrue to the new pension scheme (yes, the one that is controlled by the owner). This needs a little bit more documentation including a 5-year business plan to be able to put an appropriate value against the IP, and this is one of many areas in which a Finance Head can help. Ask Michael Cartwright to introduce you to the most appropriate FinanceHead for your business.

Chris Burton-Brown
FinanceHeads Member

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