Your Money and Your Business

2. Financing Your Business

2.1 Always look at the security of any borrowings you make.

• If you are borrowing to invest in your business and it is a high-risk venture, you probably shouldn't do it. Can you afford to lose what you are providing as security - particularly if it is your family home?

2.2 Taking out a mortgage - or a second mortgage - on your domestic property and then lending the money to the business can be a cheap way of raising capital.

• Interest rates are lower than for conventional business loans.
• Some mortgages give you the flexibility to vary repayments according to your changing financial circumstances. You may be able to make overpayments or underpayments, repay lump sums or take payment holidays.
• One catch is that there is no mortgage interest relief in the UK.

2.3 Business bank loans are still relatively cheap. (See Overdrafts and bank loans.)

• But make sure you will be able to cope with probable increases in interest rates.

2.4 You could structure your business to qualify for the Enterprise Investment Scheme.

• This helps certain types of small unquoted companies to raise capital by providing tax relief on investments of up to £200,000 for investors in these companies.
• Most trades qualify. Those that don't include hotels and guest houses, property development, and financial activities such as insurance and hire-purchase financing. Other conditions apply.

2.5 Think carefully about the best way to acquire a business property.

You could buy it in your own name and charge the business a rent.

Or you could create a small self-administered pension scheme for directors, who make contributions to the scheme and get tax relief on them. This buys the freehold to the property and rents it back to the business.

• Where resources are limited, such a scheme can help you buy a property while funding pensions at the same time.
• There is tax relief on the full cost of the building and the rent payable.
• The property must be purchased - and rent charged - at a commercial rate.
• The pension scheme can borrow to fund the purchase.
• No capital gains tax will be payable on a subsequent sale.
• The property will be protected against insolvency or bankruptcy as it will not be an asset of the individual or company.