If your client was looking to raise external finance for their business, who would they call? This was a question the British Business Bank (BBB) probed a couple of years back in this survey of UK small to medium-sized enterprises (SMEs.
Shockingly, the findings showed hardly any respondents would use their financial adviser as a first port of call with a mere 2% saying they would first speak to their financial adviser when they realised they needed finance. In contrast, (54%) of respondents would first speak to their main bank.
And all this against a rising backdrop of trust and confidence in the professional advice sector. Another 2016 survey, this time of advised clients by the Chartered Institute of Insurance, showed an increase in trust – that’s right, in advisers – from 43% in 2013 to 60% in 2016.
Clearly, by speaking to their bank rather than their financial adviser, clients put themselves at a disadvantage as they risk missing out on the depth afforded by independent financial advice – simply what is recommended might not be most suitable financial product from the whole of the market.
Another surprising finding of the BBB survey – to me at least – was that there was no mention whatsoever of using pension savings as an alternative means of finance.
Many SME business owners who have built up a pension pot are able to use this to purchase a commercial property using a SIPP or a SSAS – and possibly solve a business funding need in the process, whether this be to fund working capital, drive expansion or something in between.
Although not a secret, as the BBB survey shows, there is more to be done to raise awareness of using pension savings for business-funding purposes. For one thing, the demand is clearly there: four-fifths (80%) of small businesses – that is, those with between 10 and 49 employees – have used external finance in the last three years.
Moreover, ‘business owner’ or ‘company director’ sounds like a typical profile of a financial adviser client to me. But how many financial advisers routinely present the possibility of using pension savings for business funding purposes? For those advisers that do not, I would suspect there are hidden opportunities lying in their existing client banks.
A significant percentage of commercial property transactions under our own SIPP scheme are secondary planning exercises – the business premises are already owned by the client (either personally or via their company) and the SIPP is being used as a secondary equity release vehicle. The results of that BBB survey suggest, however, the knowledge of such a possibility is not widespread.
Clearly, using pension savings in this way may not be appropriate for everyone yet you would imagine it is not until advisers routinely discuss the option that they will they start receiving the call ahead of the bank.
The BBB survey also found that 55% of respondents believed it would be either “fairly” or “very” difficult to gain finance so, at a time when SMEs are finding it difficult to gain financing from the bank, a pension-based solution has a powerful draw – the client is not reliant on a third-party. Rather they are simply making use of their existing savings, albeit those saved via a pension.
Additionally, the absence of any third party means any financial benefits are retained for your client’s ultimate benefit – for example, accumulating pension savings via the collection of rent. From an adviser’s perspective, the key long-term benefit of recommending such a solution is creating additional client loyalty by engaging in their business needs.
Hopefully, some advisers will consider the merits of such a pension-based solution worthwhile enough to consider reviewing their client banks for suitable candidates. Time – and the next BBB survey – will tell whether such efforts see pension savings end up increasing in popularity as a means of business finance.
Lee Halpin is technical director @SIPP