An Alternative to Small Business Bank Lending - By Yellow Brick Road Financial Planning
|Published: 18th May 2012 09:26|
Many small business owners are aware that it is possible to hold a commercial property within a pension such as a SIPP. However many do not know how else expert financial planning can help their business.
John Roberts is a 52 year old owner of a small successful engineering firm that owns the commercial property it operates from. John has been saving for his retirement for many years and has accumulated £285,000 in retirement savings across a number of different plans. He is able to make ongoing regular employer contributions of £500 a month and is looking to retire in 13 years' time.
At his Annual Review with YBR Financial Planning he expresses his frustration that he cannot access any of his pension fund until he is age 55, when he can withdraw 25% tax free.* It turns out the firm requires specialist machinery costing
£70,000 that would improve the firms efficiency, increasing future profits while securing its future and future sale value.
The company could afford to fund the purchase of the specialist machinery out of cashflow or with some direct bank borrowing. However John is aware that the current economic climate is not conducive to business expansion. Much of the problem derives from the difficulties companies experience in obtaining lending from the banks. John also does not want to commit too much cashflow towards this project.
YBR Financial Planning advises him that it is possible to transfer and consolidate his retirement plans to special type of pension called a SSAS. This SSAS can make loans to the business connected to its members; the sponsoring employer.
The cost of setting up a SSAS is comparable to that of a bank loan; the loan can be agreed quickly, directors do not need to spend any time at the administrator's office in order to justify their loan request, and once the documentation is received the loan can be processed with the minimum of delay.
The amount that can be loaned is restricted to 50% of the net value of the fund and it must be secured as a first charge over assets equal to the loan and the interest for the period. In this case it can be secured against the commercial property Johns firm owns. Capital and interest must be repaid by equal instalments over a maximum five year period. The interest rate is a minimum of 1% above base but a higher commercial rate of interest can be used.
The interest is paid to the scheme for the benefit of the member and the employer can deduct this as a business expense. Furthermore, because the firm is buying the specialist machinery, they will have full access to all capital allowances available.
* Please note that this is a theoretical example only
The value of pensions can fall as well as rise. You may get back less than you investedContact Yellow Brick Road Financial Planning today to find out more T: 02392 704274 www.ybrfinancialplanning.co.uk
YBR Financial Planning is a trading style of Positive Solutions. Positive Solutions (Financial Services) Ltd. is authorised and regulated by the Financial Services Authority. Registered as a Limited Company in England and Wales No. 3276760. Positive Solutions, Riverside House, The Waterfront, Newcastle upon Tyne, NE15 8NY