How To Fund Your Franchise Interest-Free Using Pension Release
Funding a franchise has never been trickier, unless you’re aware of this little known secret.
So you’ve done your research and you’ve settled on a franchise in which you’d like to invest. Now it’s time to work out how you’re going to get the money together.
You’ve looked at the figures supplied by the franchisor. And you’ve created a detailed business plan, which has given you a pretty accurate idea of how much money you need to get started. So how do you fund the purchase and establishment costs of the franchise, and allocate enough money to cover working capital until your cashflow becomes positive?
You may have some savings you can utilise, but make sure you leave yourself a decent emergency fund, just in case things don’t pan out. A figure covering six months ‘living expenses’ is about right, including the servicing of your mortgage and other debts.
If you’ve exhausted your capital, then borrowing is next on the agenda. In these austere times, banks aren’t rushing forward with unlimited facilities. And those loans and overdrafts that are on offer can often be charged at penal rates of interest. Having to service expensive debt at the start of a new franchise puts it under considerable pressure, and where possible, it’s best avoided.
To give your franchise the best chance of success, you must explore all your options. Especially one that’s almost always overlooked.
Yet it could be the most efficient and effective way to raise the money you require, whilst also being entirely in line with your proposed intention to invest in a franchise. Your pension fund. It could make the difference between failure or success in your new franchise.
During your working life, if you’ve been a member of an employer’s pension scheme, or you’ve been contributing to a pension in your own name, or you’ve contracted out of the State Pension Scheme or SERPS as it was known, you could be sitting on a remarkable sum of money. Money that’s being managed for you by your pension provider. But how has it really been doing?
In the last five years, it might surprise you to learn the average pension fund has grown by a paltry 3% to 5%. And with continuing financial uncertainty in Britain and around the world, the medium term prospects for growth are at best unpredictable. Here’s some maths.
If you borrow money to invest in a franchise and pay interest at a rate higher than 5%, you’ll probably be throwing your money away, compared to releasing the money you need for your franchise from your pension fund. It just doesn’t make sense to borrow from a bank and pay 10% when your pension fund is only growing at 5%. That’s one step forward in your franchise, and two steps backwards in your personal financial security.
When you ‘borrow’ from your pension fund, you set the ‘interest rate’.
You release tax free cash from your pension. You use it to fund your franchise. To give your franchise the very best chance to succeed, you pay your pension nothing. It’s effectively an ‘interest-free’ loan. Whilst it sounds wonderful, it is a risky strategy, for you need your pension fund to keep growing so you’ll have enough money to live on when you retire.
A sensible move is to pay your pension fund 5%. That way, you’ll be no worse off compared to average pension fund growth. The capital will be invested in your franchise. And the interest will be paid to your pension to keep it growing.
But if you really want to make a difference, pay your pension the same interest rate the bank would have charged you for a loan. It’s bound to be higher! You’ll have the pleasure of knowing you’re not adding to the banks’ billions of pounds of profits, or their questionable bonus schemes. Instead, you’ll probably be building your pension fund quicker than it is today. And that’s no bad thing!
Pension release is more than a sensible financial move.
Do you know in which companies your pension provider has invested your money? Do you agree with its choices? Do they meet your ethics? You see, when you release money from your pension, you know the answers to these questions. That’s because you’ve invested your money in a franchise you’ve spent time and effort researching. One you’ve concluded will give you a good income and has great prospects for your future. It’s possibly the perfect investment for your pension. And it gets better.
It’s usually the case that the best person to ‘look after’ your investment is you. Chances are you’ll work much harder to make a success of your franchise than the directors who work for the companies in which your pension fund is currently invested.
Of course, some might say you shouldn’t invest your pension in your business. That’s ‘putting all your eggs in one basket’ which isn’t always the best investment decision. But it can be the right move, particularly if you have a tried and tested franchise in which to invest. What’s more, you’re only able to release 25% of your pension fund in tax free cash. The vast majority of your fund can continue being looked after by a pension provider, building your retirement income for when you eventually stop work.
Releasing money from your pension is definitely worth consideration.
But it needs careful analysis, for some pension schemes enjoy such attractive benefits and guarantees, it wouldn’t make sense to release money from them. So as part of your financial analysis, you should review all your pension funds with an independent pension specialist, to see whether it’s a good idea to release some tax free cash from your pension for investment into a franchise.
Complete the form above to see how much tax free cash you could get using pension release.
If you’re a franchisor or an adviser who works with franchisors, franchisees or franchises, you could do more business by helping your clients release cash from their pensions »