Pension-led funding is still a relatively unknown product within alternative finance, but for some firms, it's a useful form of funding. If your business needs a loan, it can borrow money from the personal pension of one of the directors, and pay it back with interest. Alternatively, the pension can invest directly in the business through an unlisted share purchase.
Although it's a complex product, there are significant benefits for businesses in certain situations, and it's well worth exploring as an alternative route to business finance.
Benefits of pension-led funding
- Borrow funds from an existing pension within HMRC rules
- 6 to 10 weeks from quote to drawdown
- Suitable for pension pots of at least £50,000
- More security and independence than some traditional forms of lending
- Grow your business and your pension
How does it work?
There are two main types of pension-led funding: commercial loans and unlisted share investment:
Commercial loan from a pension
This is the more straightforward form of pension-led funding. The business borrows money from the pension, and pays it back with interest.
- Available via a Small Self-Administered Scheme (SSAS) with trustee approval
- Maximum loan is 50% of the pension fund’s value
- Interest rate needs to be a ‘commercial’ rate
- 1st charge security required – this can include intellectual property assets
Unlisted Share Investment
- Available via a Self-Invested Personal Pension (SIPP)
- Either ordinary unlisted share investment, or preference share investment
- Independent share valuation appraisal required from suitably qualified accountant
- Can potentially use up to 70% of pension scheme value
- Only suitable for asset light businesses
- Good option for franchise opportunities
Intellectual property (IP) sale and leaseback
In many forms of funding, lenders will often ask for security. That might be a charge over a commercial property or other valuable assets like machinery or vehicles. When lending is 'secured', it gives the lender reassurance that their risk is lowered, because there's a valuable asset in the background that they can claim and sell to recoup their outlay if repayments stop.
Pensions, on the other hand, aren't allowed to own tangible assets like property or machinery, so securing the lending is more difficult.
That's where intellectual property (IP) comes in. Pension funds are allowed to hold this type of ‘intangible' asset, so your business can sell intellectual property to a pension fund and lease it back. When the director retires and starts using the pension, they could either sell the IP back to the business for a profit, or keep it as a source of income and continue leasing it to the business.
Intellectual property means patents, trademarks and copyrights, or it could be domain names and other assets associated with your brand. If your business grows over time, the IP will go up in value as well — meaning your pension will get a series of lease payments as well as a profitable lump sum when it sells.
How is pension-led funding different to other types of business finance?
Pension-led funding gives you a greater degree of independence, because it's your business borrowing from your own pension. Within the rules, you're the one that decides how much can be borrowed. Of course, the pension provider will have to agree to your plans, and you'll need a specialist to look through all the details — but fundamentally, pension-led funding gives you a bit more freedom than other types of business finance.
Pension-led funding also offers another route to finance if you're considering various forms of security. Many business owners raise larger amounts of finance against the value of their home — or get a smaller sum unsecured. Pension-led funding offers a third option to those who would rather use their personal pension as security than their house.
Pension-led funding also gives you the unique possibility of growing your business and your pension. With a standard growth loan, you pay interest in the short-term to grow your business in the long-term — with pension-led funding, if the business does well, the pension fund will grow too.
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