Business Link

by Michelle Hardy-Berrington

In a post-recession world, the term “credit” has become a four-letter word for many individuals and businesses. Yet the reality is that credit is the lifeblood of business and economies as without it, industries cannot grow.

A business loan is credit given to an incorporated business by a bank, credit union or other financial institution, and is usually the fastest way of raising money. It also allows the owner to retain the current ownership of the company instead of selling an interest to an investor to raise funds.

“The realities of running a business can be overwhelming,” says Zelda Brown of Fresh Start Debt Counsellors and Business Starters. “To succeed, you’ve got to make some sort of forward progress, no matter how small.” Sole traders and partners are liable for all the debts in a business venture; whereas with limited companies, the directors are liable only for the amount of debt they personally hold in the company or the value of the guarantees/sureties signed by them. The size of a business loan is often much larger than a personal loan or other means of raising capital. But the companies lending the money will want to know that they stand an above-average chance of being paid back. You will need financials, business plans, and more.

When you should or shouldn’t borrow

Before taking a loan Brown advises business owners to consider if the loan supports the business plan, mission, and ultimate goals. A loan must always offer opportunities of business growth and expansion, especially the growth of assets. This sounds obvious, but unnecessary renovations to existing premises is a simple example of a loan that does not offer growth – unless it adds dimension or service/product enhancement to the business. Owners must also confirm that the company’s financial forecasts of the income statement, balance sheet, and cash flow statement support the lending.

Conversely, it’s a bad idea to get a loan when there are no assets built, no progress to measure, and no likelihood that the investment will increase opportunity for growth and increased net profits. The owner also needs to think twice if the loan is needed to pay off existing debts or to cover monthly operational expenses. “Before making the decision, be clear on what the money will be used for,” says Brown. By taking the loan, will you be growing your business? Or is it time to let go of an underperforming business?”

In personal financial trouble?

The recession has seen many individuals turning to a Debt Counsellor.

Debt counselling can help protect a business. Only private individuals, including those who are directors/members of businesses, qualify for debt review. “The business entity will not be affected. Any Directors, members, and partners would be assessed in their personal capacities,” assures Trevor Trollip of Fresh Start Debt Counsellors and Business Starters. “The only involvement with the business is as a salaried person, if this is applicable.”

“Any consumer (private individual) who is over-indebted can apply for Debt Review. The amount of debt is not a factor. Over indebtedness is defined as when a consumer’s repayments on his/her credit obligations are more than his/her disposable income,” he says.

Disposable income is calculated by determining the net income after PAYE, UIF, Pension, Medical Aid and other compulsory payments. After allowing for reasonable monthly living costs, the amount left over is used to pay the creditors. After the consumer applies for Debt Review, the Debt Counsellor will restructure and reduce debt payments by negotiating with creditors in order to get the consumer debt-free as quickly as possible. The consumer may have to adjust living standards and even dispose of luxury assets. During this time, no creditor, who is part of the Debt Review, may pursue legal action against the consumer.