An alternative to small business bank lending
For small business owners, 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.
Bank lending to small businesses has fallen to a record monthly low. According to the British Bankers’ Association, in April 2011 just £449 million, almost half the typical monthly amount of £991 million in 2008, was loaned to small firms.
Various reasons have been given for this low lending figure; the cost of sourcing lending, and the lengthy process before a loan, if agreed, is paid to the company. Many directors of these small companies would rather use their own money, or borrow from friends, than seek help from the banks.
An alternative is for directors to use their own pension savings to support their company by setting up a small self-administered scheme (SSAS). A SSAS, unlike a self-invested personal pension, 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 establishment of a SSAS is not reliant on receipt of new contributions; it can be set up by transferring funds from other registered pension schemes. 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. 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.
For a company having difficulty obtaining bank finance, this may well be an option worth considering.
If you have any questions, please send them via the enquiry box on the right hand side, call 08445 440550 or email us.
