Pension-led funding (PLF) – Hear it from the Horse’s Mouth!

The PLF Journey from two commercial finance broker’s perspectives.

Laurie used PLF himself to finance his business…and Nic used PLF to achieve development financing for his client.

Laurie Baugh – Rathstones Financial Ltd

Laurie Baugh had his heart set on running his own broker business after leaving his banking job. The all-too-familiar lack of finance stood in his way, but it was Pension-led funding that delivered the solution and the lasting benefits that confirmed Laurie had made the right decision.

Where did PLF come into the process?

“It was about making your pension work for you and ultimately having that control,” Laurie said. “On the day I received my funding, I managed to declare a dividend and pay off all my finance agreements. The investment from my pension secured my long-term cashflow.”

A perfect result for the Commercial Finance Packager who turned to Pension-led funding initially to help a client finance a property deal but decided the best way to understand the business funding possibilities, and become his own boss, was to go through the process himself.

But it was Laurie’s pension scheme, a legacy of seven years with the Royal Bank of Scotland, which proved key to financing his dream.

“As a broker a pension is one asset you are likely to have. Commercial property deals can take up to 18 months to two years to write. Starting up you probably have to fund yourself for 18 months. That is a challenge.”

“I see PLF as low risk because I’m in control of the money and want my pension fund to have it. It was by far the best option to do what I wanted,” he said.

Nic Franklin – Franklin Commercial Finance Ltd. 

It was a doddle!”

This is how Nic Franklin, described his experience of brokering a deal for his client utilising Pension-led funding.

The client came to Nic looking for a £650k development loan to build commercial premises on a site they had already purchased using their own cash via their development company, GDV £1.1m.

They had secured a 15-year pre-let to the Coop & the intention was to sell the investment on completion.

Nic had previously worked with this client, an experienced developer, over a number of years, and once fully briefed, carried out the usual due diligence, gathering the relevant information to assess the proposal. The wealth statements revealed that the directors both had significant private pension funds, totalling around £1.5m.

He approached four lenders for terms on a standard development loan basis and terms for a Pension-led funding facility.

The lenders responses fell well below the client’s requirement, which would only be achieved if the directors were willing to give security over other properties in addition to the development site.

So why did PLF work for the clients?

  • They were able to raise the full amount required.
  • The client had total control of the funds – they were able to draw down the full amount when they wanted it & there was no requirement for a building surveyor to monitor the scheme as there would have been with a bank-led facility.
  • The interest charges stayed “in-house” funding their pensions as opposed to a funder.

“Following that face to face meeting, The PLF team did all the running around, liaised directly with the clients & their IFA to arrange the facility whilst keeping me updated throughout the process.”

The client received all of the £650K of funding required.

“I wouldn’t hesitate to recommend or use Pension-led funding in the future. Not only was it a good experience and great outcome for my clients, but the process and professionalism from the team at PLF was second to none.”

If you would like to know more about how Pension-led funding might work for your business or your clients, contact our PLF specialist, Tom Whitlock at tom.whitlock@clifton-asset.co.uk or visit our website at www.pensionledfunding.com

Pension led-funding and Startup4ten coaching and mentoring services

Early stage businesses are notoriously difficult to arrange finance for. At the same time, the founders usually have tremendous energy and enthusiasm.

Matching exciting start ups with a viable funding source and the coaching and mentoring they need gives them the kind of start that can boost their chances for success.

Money and advice. It’s a winning combination!

The Startup4ten Online Accelerator has been designed to be affordable and accessible to everyone who wants to invest in their own future, and its role is pivotal in helping the entrepreneur make good decisions based on their objectives, the business landscape and the available resources.

There is no lack of entrepreneurial talent or good ideas, but implementation is key and that requires a blend of many things. There is also a lot of “business noise” out there for the entrepreneur to filter and the Accelerator keeps them focused on what is important to long term success, helping the business to manage this “noise”.

Pension-led funding is pleased to recommend the coaching tool, Business Basics™ as it provides a simple framework for entrepreneurs to work with and this integrates to a coaching and mentoring team who have all run successful businesses themselves across a range of industries. They bring business reality and the knowhow gained from solving different business challenges, as opposed to business theory.

Working with the framework and a coach from the Accelerator Team who has realbusiness experience, provides a blended learning approach, helping the entrepreneur and their team to see the business from a different and wider perspective and this helps the business to fulfil its potential.

As well as the online programme and one-to-one coaching, the team also host online sessions on different topics which are only be available to companies enrolled on the Accelerator. As well as acting as a vehicle for learning, these group sessions can also help entrepreneurs to build their business network from within the Accelerator and you never know what opportunities can come out of the connections you are still to make in life.

You will find more detail on the website www.startup4ten.co.uk.

A rich seam of opportunity

In various earlier pieces we have looked at how, very often, economic, and financial crises lead to
a spike in individuals deciding to set up their own business. For those involved in providing
services to SMEs this can be very good news indeed as, clearly, hundreds of thousands, if not
millions of new businesses will need a ll kinds of products and assistance, one such being funding.

Within this cohort of opportunity there is a really important subset who have, statistically speaking,
had the highest success rate in establishing and growing a viable new business from start-up to
maturity – the “Olderpreneurs”.

Olderpreneurs, as the press has dubbed them are, loosely, over forty five years of age and have
the distinct advantage of considerable workplace experience and connections when establishing
their own enterprise. They also, usually, have personal assets to leverage when getting started so
funding is easier to achieve. Paramount among these useable assets is an accumulated pension
pot from earlier employment which can be deployed, immensely effectively, to fund their st art up
using Pension led funding. This is great news for both them and the introducing advisor.

Don’t miss the opportunity. When talking to clients who may need funding, either to start or grow,
look out for the signs:

  • Older individual?
  • Has assets in a pension somewhere?
  • Looking for finance?

The above is a perfect mix for an introduction to Pension led funding. Earnings for you and, of
course, a very grateful client.

Happy days.

Has Coronavirus made you think about becoming a business owner? Let’s take a look at the things you should consider before taking the plunge.

It’s very sad, but pretty much every day we hear of more businesses failing and consequently more people losing their jobs and facing redundancy. If the predictions of a second spike are correct, that, together with the phasing out of the Coronavirus Job Retention Scheme, will push the jobless numbers to levels not seen since the great depression, or even worse.

For many, and particularly the older section of the workforce, finding new jobs in such a downturn will be problematic indeed, so for many thoughts will turn to other options, one of which being starting your own little business.

On the face of it this is not such a radical idea. After all, there are currently around five and a half million small businesses in the UK employing around half of the private sector workforce, and, since with great changes come great opportunities, now might seem like a good time to join their ranks. After all, what have you got to lose? Well potentially quite a lot actually, so some careful thought is needed before taking the plunge:

Temperament

Running almost any small business involves taking risks and making decisions on pretty much a daily basis. Are you the sort of person who would be comfortable with this, or could become so? Paradoxically this never goes away as the larger your business gets the bigger the decisions you have to take and, consequentially, the bigger the downside if you get it wrong. So best to be sure that risk is something that you can handle as an everyday part of your working life.

Appetite to work

Lots of business owners work crazy hours, especially in the early stages when there are all sorts of things to be done but no budget to hire other staff to do them. Would you be comfortable with this for a few years, at least, or are you more of the type that insists on going home at five and forgetting all about work? If it’s the latter then the SME world is probably not for you.

Hiring and firing

Have you been a boss before? Do you have the mindset to recruit and manage, and, if necessary, discipline other people? Or would that make you uncomfortable? Again, if it’s the latter then you may want to think twice about being your own boss as usually that leads to being other people’s boss as well.

Having said all of the above, running your own enterprise that you have built from scratch can be incredibly rewarding, and not just financially. A successful small business provides great benefits to a surprisingly wide community of people. Clearly any staff that you hire benefit directly from their employment, but so do their families or dependants. The shops, pubs or restaurants where they choose to spend their earnings benefit also. Your suppliers also gain from your existence and thus so do their own staff. The taxman takes his cut from both your own earnings, your profits and the payroll taxes that are levied on your employees, and thus the wider county is also better off because of you, and as a result can afford to spend more on all the necessary things that governments have to provide.

In short you are a wealth creator and that’s a pretty good feeling.

Clearly there are some common sense steps that you should take before you press the go button:

Establish your offering

The first, evidently, is to decide what it is that you would want your new business to do. Have you, during your career to date, acquired any marketable skills or knowledge that could be transferred into your own business? If so, this could be a very strong starting point as, in addition to knowledge you may have a ready-made network of potential customers and suppliers which is at least half the battle. If not, are you starting out in a field in which you have some background, such as a hobby that could be turned to profitable activity?

Create a business plan

Having established your offering it is absolutely essential that you put together a proper business plan. There are many online resources to help you do this as well as government sponsored assistance. Having developed your plan, it is just as important to have it tested and challenged by a third party who has the appropriate background to ask awkward questions and challenge optimistic assumption. Asking your mum probably won’t cut it.

Source funding

Lastly, a critical part of the plan should be to identify how much funding you are going to need and where you are going to get it from.

In very simple terms your source of funding comes from one of three places, or a combination thereof. The first is your own resources, the second friends and family and the third, and most common is a loan or other finance from a commercial third party such as a bank.

It’s fair to say that banks are not overly keen to lend to SMEs right now and, even if you did apply successfully, the security requirements would likely be pretty onerous for any amounts more than trivial sums. A charge on your domestic residence is the usual way of taking security, something that significantly ramps up the pressure and risk.

Beyond the banks there are a wide variety on non bank lenders, some government backed such as the Start UP Loans Scheme which, dependant on the amount required can be very useful. Navigating your way through the maze of offerings can be tricky however, so registering with one of the business funding aggregator sites such as www.alternativebusinessfunding.co.uk is always a good idea. Not only will you quickly discover who has an appetite to lend to you, you will also be able to compare how appropriate their products are to your business needs.

Using your own resources can be a good idea too. Basically you are risking your own money and thus don’t have to dance to the tune of external lenders, as long as you are happy that if things go wrong you can survive the loss without catastrophic consequences. One way of doing this which has grown rapidly in popularity is Pension-led funding. Basically, if you have accumulated pension savings during you previous employments these can be used, subject to a number of checks and balances, to provide the finance that your business needs. See above regarding risk, but on the plus side you do end up paying interest to your own pension pot instead of a commercial lender which is always a bonus. You can find out more at www.pensionledfunding.com.

So, business idea? Tick. Relevant skills or experience? Tick. Credible business plan? Tick. Funding arranged? Tick. Seems like you’re good to go. Get ready for a wild ride, but if things do work out it could be the best decision you have ever made. After all, to quote Brutus in Shakespeare’s Julius Caesar ‘there comes a tide in the affairs of men which, taken on the flood, leads on to fortune.’ Good luck.

Adam Tavener, Pension-led Funding Chairman

9 things you need to know about Pension-led business funding and buying a franchise

Despite the challenging conditions in the economy, starting and running a business remains an ambition for millions of people.

One of the best ways to achieve this dream is to buy into a franchise system, where the work of establishing the effectiveness of the business plan has already been done.

For both franchisors and franchisees, there is a continuous need to maintain working capital, market the existing business or even expand it, while retaining maximum control of the business itself. ‘Traditional’ funding, such as bank loans, hand significant control to the lender, while also requiring personal guarantees from the business owner, such as the family home, to support the loan.

Pension-led business funding offers a sophisticated alternative involving business owners’ accrued pension benefits, held within a director-owned pension scheme, allowing them to back their own franchise and put them in control of their future.

For franchisees and franchisors alike, recommending a funding alternative to potential clients, there are a number of aspects to consider before choosing pension-led funding:

1. The Options

The two main pension-led funding vehicles are Self-Invested Personal Pensions (SIPP) and Small Self-Administered Schemes (SSAS).

For franchisors, the main funding options are – a commercial loan from the pension scheme to the sponsoring limited company, or the purchase of the company’s Intellectual Property (IP) by the scheme. For franchisees, funding is similar, except the valuation of the business is primarily through the value of preference shares – which requires a limited company – and which are an entirely separate class from the ordinary shares you are probably more familiar with.

2. The rules

When considering a SSAS loan to the business, the main regulatory requirements are:

  • It must not exceed 50 percent of the pension fund’s net asset value.
  • It must be secured via a first charge against an asset of equal or greater value to the loan capital, plus interest over the period of the loan.
  • The maximum term is five years.
  • An interest rate of at least one percent higher than the Bank of England base rate should be applied.
  • It must be repaid with equal instalments of capital and interest throughout the term.

3. Security

With pension-led funding, there is no requirement for business charges and personal guarantees. The security of a director’s non-pension personal assets will no longer rely on the fortunes of the franchise.

Equally, if balance sheet assets are used to secure the loan, the pension can create its own charge over all assets and the pension scheme becomes a preferential creditor to the business. This means, in the worst case scenario of business failure, the scheme has priority in claiming back its security, although that level of priority will depend on the status of any other creditors that might hold a secured charge on the business’ assets – such as a bank.

Following clarification in the Finance Act 2004, intellectual property (IP) is an HMRC recognised asset class for pension-led business funding. The most common IP assets are patents, trademarks, designs, copyrights, databases and domain names.

IP needs to be valued by an independent expert to meet HMRC requirements. The asset can then be used either as collateral for a pension loan to the franchisor, or purchased by the pension from the
business.

The IP is held within a creditor-protected pension environment and any appreciation in the value of IP, or income derived via lease/ licence agreements, is free from direct tax when paid back into the scheme.

4. Suitability

Pension-led business funding is not appropriate for every franchise. A pension pot of more than £80,000 is required to make the process viable. The funding also has to benefit the owner(s) of the pension scheme, so no responsible pension advisor or scheme trustee is going to agree to pension-led funding for a failing franchise. A Pension-led funding strategy requires detailed assessment of company accounts, track record and business plan, as well as an assessment of the business and the motivation of its owners and directors.

5. Funds

Some pension funds are more suitable than others and a qualified advisor should be used for all aspects of pension analysis. The advisor should have a proven track record, supported by a robust corporate and compliance infrastructure, as the penalties – for unauthorised transactions or incorrect due diligence can be significant, for both the scheme and its member trustees.

6. Pension Benefits and Self Investment

The rules regarding drawing pension benefits from a SSAS or SIPP engaged in business funding are no different to those applied to all personal pensions. Providing sufficient cash remains within the scheme, the 25% pension commencement lump sum and an income can begin / continue to be taken once the director has reached the age of 55. It should be remembered that monthly repayments are being made to the scheme as a result of the funding, so the available cash will be re-generating.

7. Scheme Structure

SSAS and SIPP are established under trust rules. The trustees are typically the stakeholders in the business. Technically, the scheme can be run by the trustees themselves; but, it is advisable to appoint a professional administrator specialising in pension investment to ensure governance and investment decisions are in the best interests of the members.

8. Timescales

Pension-led business funding should not be seen as a quick fix. A minimum six to eight week timeframe for the whole funding process is usual; longer for more complex arrangements and where pension transfers into the new scheme are required. Using an advisory firm and experienced trustee will ensure a faster development of strategy and make sure that necessary due diligence is carried out with minimal impact on company time.

9. Cost vs. Benefit

The set-up costs of pension-led funding are likely to be more expensive than ‘traditional’ lending arrangements. A significant cost will be the initial specialist advice. However, you will avoid third party arrangement fees, interest-debt and, more importantly, the requirement and potential cost of personal guarantees. The facility can also be used for future rounds of funding, which are priced at a cheaper rate as some of the initial “groundwork” has already been done for the initial round of funding.

The perfect scenario is the franchise and the pension growing in tandem, with one working for the benefit of the other. However, the most difficult variant to quantify is the impact self-investment funding will have on the business and retirement wealth of the owners. Ultimately, it is the directors of the business who are best placed to measure this opportunity cost.