Case Studies - Making a loanback from a SSAS.
A SSAS can loan 50% of its value to a connected company.
Case Study 1
EP Ltd is a well established, profitable business, that supplies specialist parts to new vehicle manufacturers. In 2009 it experienced a sharp and unexpected decline in turnover and profitability due to the recession, which hit the motor trade particularly badly. The business needed additional funding to help tide it over until trade improved. The business was already fully utilising its maximum invoice discount facility. The business assets were principally debtors, with plant and machinery. The bank were prepared to offer an overdraft facility, however, they required personal guarantees and second charges from the directors, which they were very uncomfortable with. Whilst the plant and machinery had massive value to the business, it was viewed more akin to scrap metal by the bank, hence the requirement for personal security.
The directors had faith in the long term viability of the business. The motor industry would recover. They had built up pension funds, over the years, and decided to mobilise their funds by way of self-investment into the business. A Small Self Administered Scheme (SSAS) was set-up with SSAS Practitioner.com Limited and utilised to make a £250,000 loan to EP Ltd. The loan was a 5 year term loan, secured by a first charge over a very large and important item of plant, which was professionally independently valued. The Invoice Discount provider agreed to release the plant from their debenture, as they would have a first call over the debtors, which was their principal interest. EP Ltd received the cash and made monthly loan repayments to the pension fund, as oppose to the bank. No personal guarantees were required. The cash took the pressure off, providing much needed operataing capital, and allowed the directors to focus primarily on managing the business through the recession.
By mid 2012 the company was again trading profitably, due in part to diligent management and cost control. The pension loanback had been paid down to £98,000 and the SSAS benefited from the guaranteed returns from the loan repayments. The older members of the SSAS had not been restricted in terms of taking tax-free cash or income, as plenty of liquidity remained available in the SSAS. The company has a very healthy outlook and is currently considering purchasing the freehold of the commercial site it operates from. The directors are in talks with the financial adviser regarding how the SSAS could assist.
Case Study 2
NSS Ltd are heavily involved in the Green Energy Industry, working flat out to meet demand, going from a five figure to seven figure turnover within a year. One of the directors has invented, and registered a patent for, a device to financially optimise the green energy source for the benefit of the householder. The device is attracting a great deal of interest from other companies, worldwide, who wish to be involved in the massive potential of the device.
Once again, NSS Ltd are short of operating capital as their profits are tied up in stock and work in progress. A cash injection of £50,000 would give much needed breathing space, and allow the directors to focus on the marketing and distribution of their invention. It would ensure they were not pressured financially into accepting distribution terms form a third party that were not the best available.
The directors do not have a lot of equity in their houses and were struggling to obtain funding, even with a personal guarantee. They did, however, have some personal pensions they had contributed to. They had also contacted out of SERPS, and had personal pensions that the government had paid National Insurance rebates into.
A solution was found whereby the directors set-up a new SSAS with SSAS Practitioner.com and transferred in their personal pension arrangements (having received appropriate financial advice). The SSAS made a 5 year term loan to the company for £50,000, secured via a first charge over the registered patent, which had been professionally valued independently. As additional security, the SSAS took an all asset debenture over the company, thereby making the directors the principal creditors of the business. The directors were particularly pleased with the creditor protected status of the SSAS, and the business.
The company continues to thrive, and the directors can focus on operating the business instead of chasing invoices. The SSAS provided funding where none was available, with the pension fund receiving the commercial profits of the borrowing instead of a third party lender.
Advice should be sought from an Independent Financial Adviser before setting-up a SSAS and making a loanback.