One way to finance your SME that's refreshingly free from red tape is to dip into your pension fund. Here's what you need to know.

By Farah Khalique

The explosion in UK alternative finance is putting more SMEs on investors’ radar than ever before, but for those business owners who prefer a solution that’s closer to home there is always the option of dipping into your pension. It may not yield as much as other forms of alternative finance, but at least requires no third-party arrangement fees or onerous personal guarantees. 

To go down this route you need to set up a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) into which to transfer your existing pension. You'll ideally have a minimum pension pot of £50,000 and a decent business plan.

SSASs in particular are increasingly being used by companies that want to borrow from pension assets. This type of scheme offers a loan facility whereby you can lend up to 50 per cent of the net fund value to your business, as long as it's paid back with a reasonable rate of interest. Both SIPPs and SSASs allow investment in commercial property – ideal for an SME that needs new premises.

There is estimated to be £100 billion sitting in pension funds that could provide working capital to SMEs, and £466.5 million would be made available if the share of investment matched that of the US.

It can take six to eight weeks to secure the funding and there are set-up costs, but it is significantly quicker than going through a government funding scheme, which can take up to 10 months.

Anyone can set up a SIPP from an individual to a company, but only company directors are eligible to join a SSAS, with a maximum number of 12 in any one scheme.

There is estimated to be £100 billion sitting in pension funds that could provide working capital to SMEs, and £466.5 million would be made available if the share of investment matched that of the US.

For those over the age of 55, the good news is that you don’t need to set up a SIPP or SSAS at all to tap into your pension. Since April 2015, over-55s have been able to withdraw as much income from their pension pot as they like with zero restrictions.

Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter.