Starting a business? Look at the (funding) alternatives

The shift from downturn to uplift could provide a significant boost to the SME economy given that, even during the toughest economic period, many entrepreneurs followed their instincts and opened new businesses, often to great success.

By the end of last year, more than 420,000 start-ups had been registered over a 12 month period and, so far, more than 350,000 new businesses have joined the UK’s vital SME economy in 2013. This is certainly good news, but the fact remains that, for many new business owners, the issue of funding a start-up remains a serious challenge.

As an increasing amount of money has been made available for the banks to lend, through Government initiatives such as the recently-extended Funding For Lending Scheme, business owners apparently remain reluctant to borrow from traditional lenders. Credit terms are certainly easier than they have been for some years, but high street banks, credit finance houses and venture capitalists are still, understandably, reluctant to fund SMEs without a slew of personal guarantees, or support from an alternative lender willing to share the lending burden.

It is these alternative lenders that have been instrumental in supporting the UK’s start-ups over the past few years. Witness the growth of crowdsourcing, and peer-to-peer lending.

And, with many of the more recent entrepreneurs being at a more mature stage of their careers – having been forced, or chosen to leave the corporate roles – pension-led funding has also become a particularly popular choice of finance for new business owners and directors.

One of the reasons why pension-led funding provides a complementary support to ‘traditional’ lending is that it changes the balance of risk – being funding by company Owners/Directors for company Directors. In essence, it takes existing pension assets of the owners – which are often held in a variety of different pension schemes – and, after consolidating them into a single scheme (usually a SIPP or SSAS), lends money to the business by loaning or purchasing an asset of the business.

Given that a start-up business is unlikely to have many tangible assets, Intellectual Property (IP) – such as patents, specialist knowledge, databases and even web domains – provides an excellent opportunity for start-up funding. Most importantly, this form of funding is gaining the support of the ‘traditional’ lenders, in particular the high-street banks, who view it as a self-help funding partnership with business owners who are prepared to back their own company.

How it works
The starting point for pension-led funding is a detailed company assessment which, first and foremost, includes examination of the business plan. This is the most vital weapon in any start-up’s armoury when it comes to funding and, even though it may cost several thousand pounds to prepare, is a critical investment for the future of the business. In addition, track record and motivation of the owner/directors, the proposed funding structure of the business will also be evaluated, along with the total value of the available pension assets held. All of this information should be readily available to the well-organised entrepreneur and the assessment should be undertaken by a pension advisor with specialist knowledge of pension-led funding.
Where IP is being used for funding, once satisfied there are strong enough business foundations, the pension specialist will commission an IP valuer. It is essential the valuation is entirely independent of the funding process to satisfy HMRC and protect the pension fund and its trustees.
With the IP value established, the pension fund can agree to purchase and leaseback some, or all, of the IP from the business. The funding, via cash transfer is facilitated by the pension specialist. Repayment is usually a straightforward monthly sum paid by the business back into the pension fund at an agreed rate of interest (commonly around 5%). These payments are tax deductible and protect the IP within the pension scheme.

Who it works for
Pension-led funding is not suitable for every start-up. Available pension assets need to exceed £50,000 to make pension-led funding viable and no responsible pension specialist will allow funding to go ahead for a business idea that has little chance of success and is not supported by solid market research and a business plan.

Perhaps the best benchmark of all, however, is the business owner themselves. If they have confidence in their business idea and the future prospects of their start-up, and are prepared to back their own business with some of their own money, they are very likely to gain positive support from pension-led funding or other alternative lending sources. If they lack that basic confidence, they certainly should not be considering using their own money to fund their business but, equally, they should not be asking anyone else for money to fund it either.

Adam Tavener Chairman of Clifton Asset Management, who runs the online resource, For further information about pension-led funding, visit