Loanbacks from a SSAS
Although many clients have strong business models and are achieving healthy profits, they frequently require additional liquidity in order for their business to develop. Those who do meet with their bank manager and manage to hurdle the ever-increasing criteria required to be approved for funding, are then faced with interest rates that are better associated with credit cards or payday loan companies, rather than being business or long-term private client centric.The role of a SSAS
In some cases, the use of directors’ pension benefits to establish a SSAS (small self-administered scheme) could be an option. This type of pension scheme can lend money to a sponsoring employer at a commercial rate.
A SSAS is able to lend half of its value to a sponsoring employer, and with the average age of a director being 58, many may have considerable pension funds which have been built up over the years. If these funds are combined, there could be a substantial amount of money available for lending purposes.
These loans, known as a loanbacks, are useful in assisting the development of a business but are also efficient when a company is already producing healthy profits. A lump sum contribution can be made to the pension scheme and then loaned back to the business in order to retain the cash within the company. This creates a corporation tax saving. It should also be noted that any interest paid to the pension scheme will also reduce profits, creating future corporation tax savings.Terms
The terms of a loanback are relatively straightforward when compared with the reams of small print associated with a high-street loan, and set up costs are also not unreasonable. Security is needed to cover the loan. The maximum term of the loan is five years with repayment on a capital and interest basis. Therefore this vehicle should be seen as a short to medium-term funding solution and not an open-ended debt source.
As well as the advantages outlined above, a loanback can provide an excellent return for the pension scheme as well, certainly over and above what can be provided in cash.Planning essential
It is important for clients to know that there are alternative sources of finance available, but appropriate planning is required before considering such a proposal.
In essence, a loanback is the type of short-term facility which is great for assisting a business to develop, but care does need to be taken in order to avoid it being used incorrectly to support a failing business model.By Adam Francis, Consultant