Pension-led business funding for SMEs

Adam Tavener, chairman of Clifton Asset Management, looks at a form of business funding few financial and policy decision makers are aware of.

With the UK in the midst of a double-dip recession, businesses of all sizes are still seeking finance sources to maintain cashflow stability and even stimulate growth.

The government’s new Funding for Lending scheme is now up and running with hopes that the UK’s banks will loan money to the nation’s businesses more willingly. While too early to assess its effectiveness, our experience over the last five years indicates that the banks now face a considerable task in re-building bridges with the business community.

Since 2007’s financial collapse, many businesses have been faced with the challenge of maintaining stable enough cashflow to remain profitable (or simply break-even). For some there has been the opportunity to grow, while a brave few have launched new businesses, despite the economic climate.  

In most cases, these businesses have required some level of external funding assistance but have found sources increasingly hard to find, at least without facing significant penalties or constraints. Many have sought innovative routes to finance – for example turning to social media to stimulate crowdfunding.

Earlier this summer, CAM commissioned research examining SME’s relationships with financial advisors and the sources turned to for finance. The resulting report, Intellectual Property and Pensions: myths and facts, found almost three quarters (73 per cent) of SME financial decision makers appear unaware of one particular source of business funding that could put them back in control of their financing, while reducing loan risk.

Known as pension-led business funding, the finance comes directly through the owners’ pension funds and, based on current pension valuations, could inject £100 billion or more back into the UK’s SME economy. That means a significant opportunity for business growth.

Intellectual Property

One specific area of pension-led business funding leverages the value of intellectual property (IP) held within the company. This is one of the most valuable, but least exploited, business assets and its exponential growth has been helped significantly by the relatively recent strides in digital development and related technologies, whatever product or service the company provides.

It appears to be a little known fact that the vast majority of business assets reside in IP, which includes not just patents, trademarks and website domains, but also specialist knowledge, databases and even reputation. For example, in 2010 the World Bank estimated that royalty and licence fees alone generated £5.25 billion in the UK.

Related: Using IP to add value to a business

The ability to leverage the value of IP for pension-led business funding is also not a new phenomenon. As a result of the changes from the Finance Act 2004, subject to expert validation and due diligence, HMRC has recognised IP as a suitable asset class for ownership within a pension scheme.

However, CAM’s research found that of those financial decision makers questioned, 84 per cent valued their IP at zero per cent and only six per cent valued it at anything more than ten per cent of business worth. Equally, only 17 per cent of respondents felt IP was a suitable asset for a director’s pension to buy, while almost half (44 per cent) were unsure or did not know its suitability.

In practice

In essence, IP-led pension-based funding requires a detailed company assessment, followed by an independent IP valuation. Independence of this valuation from the funding process is essential to satisfy HMRC and protect the pension scheme and trustees.

Based on the IP valuation, the scheme can agree to purchase and leaseback some, or all, of the IP value from the business and the funding is facilitated by the pension specialist. Repayment is usually a straightforward monthly lease between the business and the pension fund, which is tax deductible.

Putting control back in the business

What frustrates so many directors is knowing the quality and potential growth of their business, yet they are unable to convince lenders whose own interests often come before the business they are funding.

Even with the new Funding for Lending scheme, traditional lenders may be quick to demand money back if climate dictates and will still require personal guarantees or a charge over a personal asset such as a director’s home.

Whilst not an either/or option, pension-led business funding changes the balance because it is funding by the directors for the directors.

Pension-led business funding is not just pie-in-the-sky; it is already stimulating business growth in the SME economy, with plenty of opportunities still to come.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

Related Topics

Pension Funds