Sources of finance for small to medium sized enterprises

Despite the fact that we now appear to own most of the banks, they still seem highly reluctant to lend to businesses – and when they do the rate margins are high and the arrangement fees worse.

Banks seem to have only one response …

It is, perhaps, understandable that the banks are reluctant to lend, because they are finding it difficult to access money on the wholesale markets and also need to boost their capital reserves to meet new regulatory requirements.

But that is of little comfort to businesses whose very existence is being threatened by the intransigence of the very banks responsible for the credit crunch in the first place, through their reckless investments in securitised mortgages and similar obscure financial instruments.

Fortunately, there are alternative sources of finance open to many business owners including putting more money in themselves or seeking investments from friends and family. Looking for venture capital or a business angel might also be an option, although these generally require a significant slice of the action, which could result in you giving away control of the business when you do not wish to. If you do go down this route, it is essential to ensure that you get all the capital you need up front, because if you have to go back for more money later you will pay a heavy price in terms of the additional equity you have to give up.

Another option is to ascertain whether grants are available from the government or EU, or even the Carbon Trust, who may be able to help.

… but some positives are possible

For many businesses, however, there could be an easier option and that is to secure finance from a self invested pension. Small Self Administered Schemes (SSASs), which are broadly the equivalent of an executive pension plan, can lend up to half their value to the principal employer (provided it is a limited company) on commercial terms, for up to five years. Basically this means charging at least 1% above the rate available from a high street bank (if they were lending!). There must, of course, be adequate security.

There is a massive benefit in doing this, because the interest is paid to the pension scheme instead of a bank, thus boosting the value of the pension; and the interest can be paid in addition to the maximum permitted contributions in respect of scheme members.

Self Invested Personal Pensions (SIPPs) cannot lend money to the employer of any member, so this route is not possible. They can, however, invest in commercial property that is leased by the business and can purchase such property from it, if already owned. This can be an excellent way of releasing capital into the business as well as giving the SIPP a valuable asset and rental income.

This is a complex issue and not one that should be entered into without professional advice. As with any form of investments, it is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your independent financial planner.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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