Guide to financing the purchase of
a business - Methods of loan repayments
INTEREST
ONLY LOANS:With this
type of loan the payments are all of interest, with the capital
being repaid at the end of the period of borrowing by way of a
variety of means, including: -
Endowment
Loans:These are the most well-known 'deferred capital repayment'
contracts, where a parallel endowment policy is in force and is
assigned to the lender (either on a single or joint life basis).
Monthly premiums are paid to a life assurance company to provide
aguaranteed life cover for the period of the advance and
an investment element designed to generate a tax free fund to
repay the capital borrowed, and hopefully also to give a surplus
to the borrower.
Most
lenders will accept 'low cost endowment' policies, where premiums
are level throughout the period of the loan, and most will accept
'low start, low cost endowment' policies, where premiums rise by
equal amounts for the first five or ten years of the term, then
level out for the remainder. In the long run this 'low start, low
cost' alternative costs slightly more, it is designed usually for
first time buyers with higher income expectation, but it can also
be useful for business purchase where income is likely to grow
year by year.However, the sale of new endowments is being
actively discouraged as a result of poor historic investment
performance.
ISA
Loans:Individual Savings Accounts (ISAs) are an alternative to
the endowment contract and simply represent another way of
generating a tax free lump sum at the end of the term of the loan,
which can be used to repay the capital sum at that stage. These
are considered to be very tax efficient. Life cover should be
taken out on all borrowers in addition to the contribution
into the ISA. Not all lenders allow ISA loans.
Pension
Loans:These are also a form of deferred capital repayment, where,
in addition to the interest paid to the lender, contributions are
made monthly into a pension plan sufficient to generate not only
an annual pension but also a lump sum on retirement (at the chosen
age to coincide with the repayment period) such that an agreed
percentage of this lump sum can be used to repay the original
amount borrowed. Life cover also has to be taken out on all
borrowers although the pension arrangement is usually on only one
life. This scheme, as well as providing for retirement, is very
tax efficient in that the monthly contributions (up to certain
Inland Revenue limits) qualify for tax relief.
If
there are existing policies in force we can, wherever possible,
include them in the new arrangements being made on your behalf.
There is a duty of care to give best advice in this area and the
company that we introduce you to will ensure that any arrangements
that they make are the most appropriate in the circumstances.
True
Interest Only Loans:Some lenders allow for interest to be paid during the
period of borrowing without any tangible means of capital
repayment at the end of the term. This may be because other assets
are either to be sold or to be made available to allow repayment
of the borrowing from a different source, or perhaps an
inheritance is anticipated. In addition, a true interest only
arrangement allows maximum flexibility for you to use any
combination of the various contracts described above without
there being any need for formal assignment to a lender.These options are rare on commercial borrowing.
Thus
it will be seen that there are a wide variety of options, but
perhaps not all of these will be available to you. We must
emphasize that as far as life assurance and pension arrangements
are concerned, we act merely as an introducer.
Finance Links:
This links below will help you understand the
finance aspect of a purchase of a business.
