Pension-led funding: Use your pension to finance your business
What to look out for
- Red You will be utilising a portion of your accumulated pension funds to provide the business finance
- Amber One of the least well-known forms of alternative funding
- Green As your business grows your pension grows at the same time
Pension-led funding is the only form of business finance where the interest paid on the finance provided is paid back into your pension.
What is Pension-led funding?
Pensionledfunding.com is one of the largest providers of alternative funding in the UK (source altfi.com) helping more than 2,500 UK SMEs finance their own businesses to the tune of more than £250 million. Business owners use their pension to invest in the business without the requirement for charges over domestic property or personal guarantees.
Why is PLF different?
Pension-led funding is the only form of business funding where the interest paid on the finance provided is paid back to the pension, increasing the business owner’s wealth. This can make a big difference when you compare the cost of the finance with other options, as part of the proceeds (interest) is going back into your own pension scheme.
When would PLF be used?
This form of funding is ideal for SMEs seeking working capital for growth or enhanced cashflow. It is not sector specific and keeps owners in direct control of their business finances whilst reducing the risks associated with debentures and personal guarantees commonplace in traditional business financing. Like other forms of finance, using this form of finance to try to rescue an ailing business is not advisable. Bottom line . . . if it all goes horribly wrong your pension could be one of the losers.
Could Pension-led funding be used for buying property?
Yes, a great question and it can often be used for this purpose. The main restriction here is that a pension can only borrow up to 50% of its’ existing value. An easy example is if your existing pension has a value of £100k, you would be able to borrow a maximum of £50k to give total buying power, or property cost, of £150k. There are often advantages of owning a property within your pension and we would be happy to talk more about this.
How much pension will I need for PLF?
To make it work effectively you will need a minimum pension fund of £50,000 and really a bit more. You can use other director’s pensions and even family members if it is appropriate.
What kind of repayment terms are available?
In general, terms are available from 3-10 years (loans can be repaid at any time without charge). Repayment rates between 7%-12% over bank base rate (paid to your pension scheme). The business must be UK owned and registered (Ltd LLP etc).
How is PLF regulated?
PLF schemes are facilitated through an HMRC registered pension scheme. Advice and pension administration provided by FCA authorised and regulated firms.