No one can be in any doubt about the devastating effect the pandemic has had on businesses – both large and small, and across all sectors.
While more people have headed back to work in non-essential areas and pubs, restaurants and hairdressers are about to re-open, the alert level has only just been reduced from four to three.
That means the epidemic is still in general circulation and we have a long, slow process ahead for businesses to get back on their feet and to reach anywhere near the new “normal”. The government has helped cushion the financial impact of lockdown on firms with a range of grants and help, but it will not be able to protect the cashflow squeeze many will continue to suffer for some time to come.
Graeme Price, Chief Executive of Jarrovian Wealth, says “while banks have lent hugely during the crisis via a variety of mechanisms, they are likely to be more selective in what funds they make available, and to whom, going forward. What should business owners do at times like these? Our answer is the same for all, whether you need them now or not, create your own banking facilities, and reduce your reliance on the high street lenders for your funding.”
But how can businesses go about this? Graeme explains: “Loans into businesses, outside of bank borrowing, fall mainly into two categories – shareholder or director loans and pensions loans.”
This is where you invest your own capital into the business. You can charge an interest rate, which in turn is a deductible expense on your profit and loss account (the same as a loan from your bank). You set your interest rate – for private companies, this is usually between 2% to 10%. The disadvantage of this is the tax charges you may incur to get the money into your company in the first place. Plus, the interest you make will be taxable at your highest marginal rate of income tax, although this is normally deferred as your company is deemed to pay back the capital first.
One area worth exploring if you are going to give your business a loan is ISAs. The flexible ISA, introduced in April 2016, allows you to withdraw and repay in those funds in the same tax year with no impact on your annual allowance. Check your ISA is flexible and, if not, move funds to one that is.
If you have larger investments that may suffer a tax hit if you draw upon them, ask your adviser if you can borrow against these funds, rather than dip in. Known as Lombard Lending, you are effectively taking out a mortgage against your investments, avoiding the tax charges you would incur if you cashed them in.
The most common type of lending is where the owner of the business has a pension known as a Small Self-Administered Scheme (SSAS). This type of pension allows you to lend up to 50% of its value to your business. Loans, capital and interest, are normally repayable over a maximum of five years. The interest rate needs to be commercial and is a deductible expense from your profit and loss account. The interest payment counts as a return on investment and will not impact your annual pension allowance – so worth reviewing the pension arrangements of your business.
More mature businesses can inject cash into the firm using the director’s pension scheme to purchase commercial property, owned by the business. A commercial mortgage can be raised by the pension fund for up to 50% of the scheme value. A fund worth £400,000 could raise a £200,000 loan for a deposit to buy a property of notionally up to £600,000 in value – to move from the company to the company pension scheme. Your firm pays rent to the company pension scheme to cover the interest and capital repayment on the loan. Once the loan is cleared, the rent is an investment return on the assets of the pension scheme – and does not impact your annual pension allowance.
Graeme adds: “In summary, it is worth reviewing all of the facilities that you have at your disposal and if your shortlist doesn’t cover some of Jarrovian’s suggestions, seek advice from your financial adviser to check if any of these mechanisms are suitable to be put in place to make your business not only survive but to thrive going forwards”.
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