...From dipping in to taking the plunge
When you're scanning the vast, still barely charted horizons of alternative financing, you might be forgiven for skipping over one of its least-known landmarks. You've marvelled at the benevolence of Angel Investors and braved the financial whirlwind of crowdfunding. What you may not yet have done is look at the potential of your own savings. Pension-led funding is still a relatively obscure blip on the alternative financing radar, However, it's an option that more and more people are turning to when traditional lenders turn them down. Now, obviously, you could just suck your tax-free 25% out of your pension pot for a one-shot cash boost. That's certainly a fairly common option. It's by no means your only choice for pension-led funding, though – and this is where things get interesting.
Here's how it works. Suppose you're a Sole Trader or Limited Company owner with a Small Self-Administered Pension (SSAP) or Self-Invested Personal Pension (SIPP) you want to use to pump some cash into your business. Depending on how you're set up, you could:
Yes, it all sounds bizarre – but it can work if the circumstances are right. In principle, it's really not that different from more conventional kinds of financing. You're either taking a loan from the pension and paying it back with interest, or arranging for the pension to directly invest in your business with an unlisted share purchase. Of course, a lot depends on the type and size of your pension pot in the first place, but with the business winds at your back you could grow both your business and your pension by taking this route.
A lot of people opting for pension-led funding are doing it for the independence. Banks often won't want to lend you large amounts to cover short-term cash flow issues, for instance, meaning you end up with a loan that's a bad fit. Other people choose the pension-led option simply because they'd prefer not to risk their houses by using them as security.
Of course, nothing in the world of business financing was ever simple, and this is no exception. You've got to learn the lay of the land before you step out into it, and the relatively low profile of pension-led funding means it can be difficult to get reliable, expert advice. The system comes with its own costs and risks, as with any other financing option, so you have to go in with your eyes wide open and your expectations realistic. You're going to need a rock-solid business plan, and probably a pension pot of at least £50,000 to make it worthwhile, and there are regulations and limits that you need to stick to. Still, when it all lines up just right you could be looking at serious boosts to your business and your retirement savings.
Get in touch to talk through your pension-led funding options and, as always, keep listening out for more Voices from the RIFT...