With the credit crunch in full swing, many businesses are not only finding that corporate finance is more expensive than a year ago, but also that it can be more difficult to obtain a loan at all.

The principal problem is one of liquidity. Banks depend on borrowing from depositors, each other, other investors and, in extremis, the Bank of England, in order to give them the money they need to lend to businesses, as well as individuals.

In practice this means that many loans are ‘securitised’, that is bundled up and sold to investors so that they have money to lend out again, to someone else. This is largely why the credit crunch has bitten so deeply into the economy; insurance companies and other institutional investors are amongst the businesses that have bought debt from banks, so they are now feeling the pinch and this has hit stockmarkets round the world hard.

This can represent a major hurdle for those businesses wishing to renew current borrowing or to raise new finance, perhaps for expansion purposes.

However, those companies that use small self administered pensions schemes (SSASs) to plan for retirement may not be aware that, unlike their ‘younger sibling’, the self invested personal pension (SIPP), they can use the SSAS to lend to the employer (provided it is a limited company and not a partnership).

There are, however, strict requirements relating to such loans.

Most importantly, the loan must be secured as a first charge on a tangible asset that is worth at least the face value of the loan. The maximum permitted loan is half the value of the scheme, but when calculating the scheme value any fund share allocated to a member who has crystallised a pension must be excluded.

So, for example, a SSAS with assets of £1,000,000 could lend the employer up to £500,000. The interest rate must be at least as high as that available from a reputable commercial lender (it can be higher and this is a good way of increasing overall payments into the SSAS).

SSAS loans to the employer can be for up to 5 years at the end of which time all interest and principal must have been repaid in full by way of a monthly capital plus interest repayment schedule. The lender may of course make earlier or accelerated repayment if wished. Similarly, at the end of the loan period, a new loan might be negotiated.

It is also possible to increase a loan, provided that the 50% limit is still satisfied and the security is of adequate value.

While SIPPs are not permitted to make loans to you a member, or any connected party including your business, it can lend to genuinely unconnected parties.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact Robert Bruce Associates.

Posted in: Monthly Newsletters  Tags: corporate finance, difficult to obtain a loan, liquidity, ssas, sipp, plan for retirement

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