Despite the glowing headlines in the press heralding that the worst is over in terms of the downturn and the steady stream of apparently more optimistic economic data, many small and medium-sized businesses, when asked if all this had made any real difference to their ability to obtain funding or roll over their credit lines without significant increases in fees or interest rates would probably answer no.
There appears to be a dislocation between the optimistic comments and stories in the press and the real experiences of small firms as they attempt to secure on-going funding for their businesses. Many look at a variety of different sources, but there is one option that we are seeing our SME and entrepreneur clients turn to and that is using their small-self administered pension schemes (SSAS) to provide the cash and credit they need to keep their business going in this recession.
SSAS schemes are registered pension schemes that are not regulated by the financial services authority. The members are usually directors or key employees of the sponsoring employer. A SSAS, whilst subject to the same rules relating to contributions and benefits as an insured company arrangement, has considerably greater flexibility and control over the scheme's investment policies and its underlying assets
One of the benefits of this is that a SSAS scheme can loan back money to the company. This is attractive for the company and the pension fund as the pension fund can release cash on which it was probably getting very little interest into a secure loan, as according to HMRC rules, the loan has to be secured on an asset, at typically a couple of percentage points above base, which is probably much cheaper than any bank funding in today's market.
Up to 50% of the value of the scheme can be lent to the sponsoring company and the scheme has to charge a minimum of 1% above base. The pension scheme would also need a first charge on an asset for the value of the loan plus interest, though this does not need to be a company asset.
The length of the loan cannot be longer than five years and it cannot be interest free. assets purchased have to be acceptable assets, but can be commercial property or intellectual property.
Businesses are turning to their pension schemes for a variety of reasons. For example, we recently had one printing business client who was paying quite steep hire purchase on machinery and the terms had moved against the company, so they borrowed from their SSAS pension fund to buy the machinery and significantly cut their expenses.
Also, loans from the pension fund can be used to buy both physical and intellectual property. With intellectual property, such as a trademark, there will be recurring royalty fees and these can then be paid into the pension fund tax free. for instance, one of our pharmaceutical client companies recently used 50% of the value of its SSAS fund to buy the company's intellectual property and then the royalty payments were paid back tax free into the scheme.
Over and above providing funding, SSAS funds have one further benefit - they can be converted into a scheme pension, which means at age 75, the company owner does not face the possibility of a potential 80% tax charge as can happen with some self invested pension schemes. A consequence many business owners would be more than happy to avoid.
For more information visit www.dentonspensions.co.uk
