Small businesses desperate for startup cash may find pension freedoms will give them a kick start as retirement savers look for better returns from their cash.
Peer-to-peer lending and crowdfunding are two alternative finance sources where savers can make a higher return from their pensions than from many traditional investments.
Peer-to-peer lender Zopa is offering 60-month loans of £10,000 at 4.8% interest to small businesses – with a return of 5% before tax to lenders putting up capital.
With an initial input of £500 and an extra £100 a month paid in to lend over five years, a £6,400 investment returns interest of £920.
Another popular business peer to peer business lender is online platform Ratesetter.
Ratesetter projects a 6.3% return over five years.
The higher return comes with some risk – like the possibility of borrowers defaulting.
The lenders minimise the downside by spreading the capital across several loans and carefully screens borrowers, but peer to peer lending is outside of the Financial Services Compensation Scheme should things go wrong.
Crowdfunding is another option but with a higher risk.
Typical crowdfunding projects come with Seed Enterprise Investment Scheme (SEIS) tax incentives, but startups have a high failure rate and investors can expect to stand some losses before finding a project that makes a profit.
Another option for small businesses seeking cash to develop their businesses is borrowing against their pension funds.
IFAs specialising in the market say thousands of small businesses have benefitted from setting up SiPP or SSAS pensions to finance their projects.
One platform, Pensionledfunding, claims to have arranged pension-backed funding for more than 2,000 entrepreneurs investing in their own projects.
The platform’s customer portfolio includes three entrepreneurs knocked back by BBC TV’s Dragons Den.
Their customers range from a self-employed stone mason, entrepreneur inventors to franchisees buying into brands like Costa Coffee.
Husband and wife business team Graham and Kate Holbrook successfully arranged pension-led finance for Turtle Doves, a firm that recycles silk and cashmere based in Shrewsbury, Shropshire.
Turtle Doves released £80,000 working capital from a £500,000 SSAS last year.
The Holbrooks ploughed the money into a web site, plant and marketing.
Kate said: “The funding made out money work hard for our business and allowed us to put cash back into the pension at a 12% return.”
Research by financial charity Nesta and Cambridge University found pension-led funding released £25 million to small businesses last year.